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As Greeks Vote 'No', What Comes Next?

Published 07/06/2015, 06:43 AM
Updated 04/25/2018, 04:10 AM

Equity markets have, akin to last week, sold off but the downside is for now somewhat limited. The fact that we saw a bounce in the euro and indices on the back of the Varoufakis resignation suggests that the markets expect further negotiations now. The main downside is within the Dax and the CAC 40 with the single currency manifesting its new found resilience in the wake of a crisis and remaining above the $1.1050 level.

The German bund is seeing capital flow with the 10-Year yield falling to 0.71%. Gold, the usual safe haven is effectively acting like nothing has happened at all and trades at $1164/oz, down 0.32% on the day.

Immediate focus now switches to the European response, starting with the ELA review today.


An emergency summit of European leaders has been called for Tuesday. German Chancellor Merkel is said to be meeting with French President Hollande tonight. European Commission President Juncker is also set to hold a conference call with the ECB’s Draghi and Eurogroup President Dijsselbloem this morning. The fallout from yesterday’s vote may well force some reconciliation but political damage has been done,

Utilities and healthcare are seeing most of the investor flow this morning with risk-off sentiment prevalent in other sectors. The 6500 level is holding on theFTSE 100 as support presently but the 6600 level will likely present resistance in the near term.

Bovis Homes Group (LONDON:BVS) (+0.44%)
The UK House builder has reported it will increase its dividend, as it posted a trading update. Already trading at an all-time and 52 week high, given the bullish outlook, this stock could head for 1200. Average price target from 14 brokers is 1231p

easyJet Plc (LONDON:EZJ) (+0.19%)
A rise in June passenger numbers has helped the stock hold its own this morning. The 12 month load number was 67.1 million. A rise through 1600p is required if we are to make inroads towards the recent highs. Threats of a cabin crew strike is hampering gains’

Rolls Royce Holdings plc (OTC:RYCEY) (-8.58%)
The British engineering company has downgraded its profits forecasts for this year and the next, a combination of weakness in the oil and gas markets coupled with lower demand for some of its product range being cited as the reason. The halting of a proposed £1m share buyback is not sitting well with investors today, the stock was at one point down almost 10%. With the new CEO in offices only a matter of days, there is strong possibility that he is attempting to tender expectations.

British Banks
Reuters: ‘Britain's banks have called upon the government to phase out the bank levy, saying it is damaging the competitiveness of the industry and causing them to lose business to overseas rivals.’

ISM Non-Manufacturing PMI is due out stateside later this afternoon. We expect the Dow to open down 130 points at 17600.

ECB will not throw Greece to the wolves

The market got it all wrong. Greece voted ‘no’ - with 61% majority - for another bailout package from the EU. The no vote doesn’t imply an automatic exit from the Eurozone; however Grexit becomes the base case scenario. Greece should now find 3.5 billion euro before July 20 to reimburse the ECB, besides the outstanding IMF debt.

The European equity indices gapped down in week open. EUR/USD opened at 1.1003, hit 1.0970 before steadily recovering toward 1.11; the DAX futures opened 352 pts lower and tested the critical support at 10800.

The flight to security will certainly widen the spread between core and the periphery yields even if the reasonable size of capital traffic is not hinting at any risk of contagion in the periphery so far.

Moving forward, the Greek puzzle is expected to keep the volatilities two-sided. PM Tsipras decided to continue negotiations without FM Varoufakis. The market rallied on the back of news that the headstrong FM Varoufakis resigned, apparently giving more chances for a deal to happen without his presence in negotiations.

The future of Greece in the euro looks very much uncertain. A potential return to drachma will certainly not happen in a zen environment. Yet the European Central Bank could not throw Greece to the wolves. The ECB will need to back up Greece through a so-called parallel currency, to peg the potential transitory currency to the euro and to curb an outsized depreciation in case of an exit from the euro.

The ECB will review EA following Greece’s default on its IMF payment and the refusal of a new bailout package. Greek banks and stock exchange are scheduled to open tomorrow (Jul 7), the liquidity conditions are getting extremely tight.

Grexit is not a calamity for the euro

The EUR/USD sell-off remained limited at 1.0970 – 15 pips higher than past Monday’s downtick – suggesting that the Greek ‘no’ has not been perceived as a calamity for the euro. The Greek exit from the euro will certainly lead to a revision in fundamental value of the single currency. If the contagion is avoided, a Grexit could well lift the value of the euro higher. Should the 1.10/1.0950 support hold, the way could be open for an advance to 1.1467/1.1550 mid-term resistance. On the downside, the chances for euro-dollar parity decline, support at 1.0450/1.05 is expected to fight back the QE-induced depreciation.

Versus the pound, the 0.70p stays the critical mid-term target.

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