SINGAPORE (June 29): Global markets are bracing for more volatility today following the collapse of Greece’s negotiations with creditors raising fears that it could become the first of 19 Eurozone nations to exit the common European currency.
The negotiations between Greece and its creditors collapsed over the weekend when Greek Prime Minister Alexis Tsipras suddenly called a referendum for July 5 to vote on the tough reforms demanded by the European Union and the International Monetary Fund (IMF).
Having failed to secure bailout funds from the EU, Greece is now set to formally default on €1.5 billion tranche that is due to IMF by midnight Tuesday night triggering a series of other financial events that are likely to lead to run on Greek banks as well as suspension of all further European assistance.
Banks in Greece are expected remain shut on Monday to avoid further panic withdrawals from depositors. According to some estimates Greeks have already withdrawn nearly a quarter of all the deposits in the banking system since January.
The markets were expecting a last minute compromise. While investors were aware that Greece could walk away from the negotiations, a default and a Grexit have not been priced in by investors. “We are clearly uncharted territory right now,” Siu-Kee Chan, portfolio manager for NN Investment Partners (formerly ING Investment Management) told The Edge Singapore in a phone interview from Amsterdam. “The only thing we can say for certain is that there will be a lot of volatility over the next few days,” he said. “Initially, we will probably see a flight to quality.”
Yet even the worst possible outcome in Europe, Chan argues, would still be significantly smaller in terms of its global impact than it would have been during most of the last five years. “It would still be very disruptive and trigger turmoil in financial markets for at least a couple of weeks,” probably longer, he said. It would be weeks though before investors could seriously start scouring for bargains in Europe’s beaten down markets.
Hours after Tsipiras tweeted his decision for a snap referendum in Greece, the People’s Bank of China cut its one-year benchmark interest rates by 25 basis points to 4.85% and its one-year deposit rate to 2% along with further monetary easing amid signs that the world’s second largest economy was slowing faster than anticipated. China is set to release its crucial PMI or Purchasing Manager Index data on Wednesday and GDP figures next week. Economist expect China’s Gross domestic product slowed further in the second quarter and growth this year could fall well short of the 7% target.
PBOC’s announcement on further easing came the day after Chinese stocks plummeted again on Friday. Shanghai Composite Index was down 7.4% on 26th June. It has fallen 19% from its June12th peak wiping nearly US$1.3 trillion in market capitalization. Shanghai stocks are still up over 105% over the past year. Analysts say the PBOC is trying to prevent a stock market crash even as it tries to engineer a soft landing for the Chinese economy.
Beijing’s easing measures follow the proposed new margin financing rules released by the China Securities Regulatory Commission or CSRC on 12 June. “Policy support could prevent further sharp market falls, yet investors will likely sell into the rebound to lower leverage” Steve Sun, China Strategist for HSBC noted in a report this morning. But he adds, “this could prove to be a difficult balancing act; and, ultimately, to shore up investors' confidence, earnings growth needs to come through and the hefty valuations for small-cap growth stocks have to come down.”
Is Grexit Europe’s Black Swan event akin to the collapse of the venerable US investment bank Lehman Brothers in September 2008? Will there be a contagion affect in the Eurozone? How will policy makers react to the market turmoil? The key to watch now are signals from US Federal Reserve which was expected to raise interest rates in September as well as Bank of Japan and ECB, both of which have embarked on quantitative easing measures. In a worse case scenario, if markets react badly to the situation in Greece there is a likelihood that the Fed might indicate that September hike is off the table and that both BoJ and ECB will reaffirm their commitment to further boost liquidity and upsize their own respective QEs if need be.
When markets opened in Asia, the Euro plunged 1.5% to under 1.10 to a US dollar, crude oil as measured by West Texas Intermediate was also down 1.5% to US$ 58.70 a barrel while gold was up US$ 8 to US$ 1,181 an ounce after dropping to four week low last week. At 10 am today Shanghai stocks were down 0.5% taking them into to a 20% drop since their all-time highs on June 12 or squarely into bear market territory.
