The arrival of ATM lines and capital controls in Greece combined with the bursting of Beijing’s margin- and PBoC-fueled equity bubble have plunged financial markets into turmoil to start the week with traders and central bankers alike reduced to deer in headlights ahead of a previously unthinkable Greek referendum on the euro and the continuation of brutal limit-down trading in China.
As SocGen notes, there’s only one thing left to do when it looks like the bottom could fall out at any moment: move to cash.
Via SocGen:
As we expect more volatility ahead, notably through the Federal Reserve tightening of monetary policy and poor liquidity conditions, we have built our investment recommendations and allocation to go through turbulence. Accordingly, we raised the cash position, see our latest Multi Asset Portfolio – US to unwind QE: increase cash. The unanticipated recent Greek political news flow and consequent market stress are addressed in our portfolio construction by the resilience we built into higher volatility scenarios and unexpected sources of turbulence. Indeed, the risk is not so much Greece but the structural illiquidity of the market which will exacerbate any moves up or down which should be part of the equation.
In the short term, we will see markets reacting to rising uncertainty. Indeed, don’t be surprised by a sell-off of risky assets in the eurozone (e.g. equities, peripheral bonds, euros) and the buying of safe havens such as US Treasuries, US dollars, and Swiss assets. Bunds will likely be considered as a safe haven within the eurozone, while peripheral bonds and/or OAT spreads (seen as a proxy of the eurozone a few weeks ago) should widen.
[12]
And here’s more from UBS on the flight to safety (via Bloomberg):
USTs will likely benefit from FTQ as Greece risks rise due to the imposition of capital controls, UBS
strategists Boris Rjavinski, Matthias Rusinski and Mike Schumacher said in June 28 note.
UST 10Y yield could fall ~60bps amid a worst-case scenario for Greece; yield dropped ~60bps after 1st IMF bailout request in April 2010, ~40bps after hung election in May 2012
UBS European macro strategists est. 40% probability of Grexit, which “could be further compounded by a 40% probability of inadequate policy response” in worst-case scenario
2-3yr TIPS breakevens could “underperform significantly” amid major risk-off move, “given their sensitivity to the current data and oil prices”
Note that SocGen seems to be more concerned about how broken markets will behave in the face of turbulence than they are about the actual source of the panic. So it's not so much about quantifying the damage a Greek default would inflict, or even about possible contagion in periphery assets. More important, SocGen says, is the "structural illiquidty" of the market.
In other words: we're about to find out what happens when structurally thin markets meet stiff macro and geopolitical headwinds and if China's economic deceleration and the state of proxy wars in Ukraine and Syria are any indication, this week could be but a dry run for the main event.
