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 The European Central Bank (ECB) has capped Greek banks’ emergency funding at €90b, but not withdrawn it as yet.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.

Market impact

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.

This document has been prepared by Dalton Nicol Reid Ltd, AFS Representative - 294844 of DNR AFSL Pty Ltd ABN 39 118 946 400, AFSL 301658. It is general information only and is not intended to be a recommendation to invest in any product or financial service mentioned above. Whilst Dalton Nicol Reid has used its best endeavours to ensure the information within this document is accurate it cannot be relied upon in any way and recipients must make their own enquiries concerning the accuracy of the information within. The general information in this document has been prepared without reference to any recipients objectives, financial situation or needs. Before making any financial investment decisions we recommend recipients obtain legal and taxation advice appropriate to their particular needs. Investment in a Dalton Nicol Reid individually managed account can only be made on completion of all the required documentation.
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