Monday, June 29 2015
In a surprise move the Greek government called a referendum for Sunday 5 July asking if Greece should reject the latest bail-out proposal by its creditors. The current government will be campaigning for a ‘Yes’ vote. The European Central Bank (ECB) has capped Greek banks’ emergency funding at €90b, but not withdrawn it as yet. The Greek government has announced capital controls which would limit bank activity and the closure of the stock market. Capital controls are expected at least until the referendum. A ‘Yes’ vote in the referendum could mean the withdrawal of ECB emergency funding and higher probability of Grexit.
In the short term we expect volatility to increase as markets do not like uncertainty and will re-treat to safe havens. We expect strong US$, lower bond yields and lower equities in the short term. The initial risk-off mode will take markets lower, the potential for an aggressive policy response will propel them higher. We would regard a 5% pullback in markets as a significant buying opportunity.
Potential policy response
The ECB will be watching for signs of funding stress or bank runs in the periphery and may accelerate purchases of assets. A major difference now versus the Greek crisis of 2011–12 is that the ECB has a facility in place to intervene, if required. The ECB will be looking to protect the fledgling recovery in European confidence following the Russia/Ukraine conflict last year. Market expectations of Fed lift-off will be pushed out further. Expectations of an RBA rate cut will be brought forward.
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