For the remainder of this week, market moves are to be dominated by contagion and risk aversion, but most likely not to the same extent of the recent past. The EUR's impressive rally after the fact yesterday (€1.0966 to €1.1262), referred mostly to investor confidence on how European policymakers have potentially ringed the worst effects of a possible Grexit.
After the initial shock of not obtaining an eleventh hour deal, market moves have since been relatively orderly and fluid, and this despite the nature of this week. It’s a holiday-shortened trading week, dissected by quarter- and half-year end demands, with the granddaddy of U.S. economic indicators thrown in a day early (July 2) for good measure.
Since the initial Greek market shock over the past weekend, capital market moves have been far less violent than in years past, as Europe today is considered more capable to handle the fallout from any Greek turbulence. Core and periphery economies are stronger nowadays. Their budget deficits are considerably smaller. The eurozone has a much stronger financial system and the European Central Bank has more tools at their disposal, like its quantitative easing program, to be far more proactive and aggressive when needed to be. All of this is giving investors some confidence.
Risk Diversion Diminished, But Not Abated
Barring an unexpected disorderly Greek exit or possible contagion, the consensus believes that the various asset classes (equities, fixed income, and forex) should be capable of performing reasonably well. Investors should at least anticipate the odd price gaps among the various asset classes, similar to last Sunday’s Asian open (EUR plummeted 100 pips from its Friday close). But this should have more to do with price discovery and liquidity constraints, rather than investor panic.
The risk aversion theme has diminished, but it has not abated. Greece continues to overshadow market moves as the country is set to technically fall into arrears on its International Monetary Fund (IMF) loan repayments. Greece is expected to default on its €1.6 billion IMF payment due midnight. Today is also the official end to Greece’s current bailout program. Be forewarned, Greek Prime Minister Alexis Tsipras is likely to tease markets with positive rhetoric down to the official deadline – he will always consider a last minute initiative for an agreement.
When Athens is officially unable to come up with the funds, the market will be hoping for the ideal scenario of a ‘Yes’ vote in next Sunday’s referendum, followed by a pro-creditor government transition to move to the next negotiating stage between Greece, its creditors, and the eurozone. Until the deadline has passed, traders will have to deal with liquidity constraints, market hearsay, and innuendo. Despite the situation remaining fluid, market moves will be headline-driven and subject to change in direction.
Greek Jitters Has Investors Favoring Yen
In times of uncertainty, investors historically gravitate toward what are considered reliable safe-haven investments – gold, CHF, JPY, USD, bonds — but they, too, are currently sending mixed signals.
The Swiss National Bank (SNB) has been intervening in the forex market since it abandoned the EUR/CHF peg five-months ago (€1.200). However, this week is different, Swiss policymakers have been vocal about their actions and intentions. Their objective is to discourage speculative long CHF positions from accumulating. Because of the SNB’s actions, investors seem to be gravitating more toward JPY for primary surety reasons.
Despite the JPY currency about to officially end the second quarter for its fourth straight quarterly loss, the currency is probing its way to a five-week high outright (¥122.10) mostly on risk aversion support. Market penetration through the psychological ¥122.00 handle would indicate the possibility of new downside risk to ¥120.46, however, before then traders have a lot of wood to chop. The market has been building up its short yen positions for some time, mostly supported by U.S. yield differentials.
With the SNB actively opposed to an overvalued domestic currency, investors will remain hesitant to own any significant positions in this currency. With Japanese officials more sanguine on the value of the yen, it seems a far more appealing opportunity for investors in a flight situation.
