Some quick pre-market observations from Bloomberg's Richard Breslow
Just Don’t Nip Out for a Haircut
The Greek citizenry voted and the handicappers got it very wrong. The result of the vote was called much earlier than anyone expected. It wasn’t close.
Much was made last week of the abrogating of responsibility by PM Tsipras by allowing the referendum. How can mere citizens be trusted with understanding such difficult issues? Issues that the technocratic experts got nowhere with. No one expected the result. No one was set up for the result. Chaos will ensue. But here we are, admittedly early the next morning and the markets are remarkably calm
Merkel and Hollande will meet. The ECB will meet. The Greek cabinet will meet. Cool heads will prevail. The unpopular Varoufakis is not gloating, he is resigning. The base case remains that a deal will happen because it must happen. The Greek people may have gotten us closer to a deal than all of the summits ever could
EUR/USD has held inside last Monday’s range. Two Mondays in a row, the pair has traded below 1.1000 and quickly rejected those lower prices. The 100-DMA (1.1057) is looking more like a pivot than a line in the sand. USD/JPY has bent, but not broken; 122.00 continues to be an important level and is holding. Watch the JPY as a measure of safe-haven demand
I remain a USD bull and still think EUR/USD will go lower, but its resilience in light of all the news is impressive.
Bund futures are higher, but holding well below the 55-DMA (153.61). U.S. 10-yr futures are holding below the important 127-00 level. Watch 126-16 as interesting support. Below there we are back into familiar territory
Equity futures have repriced lower, but haven’t collapsed. To be fair, they have been meandering at best for most of June. What makes them an outlier here is that both E-Mini and Euro Stoxx 50 futures earlier broke below their 200-DMA. Technically this is not a small deal. Both futures have re-tested those levels and they are good levels to watch on the day and, especially on the close
Analyst after analyst has used the “no” vote to push back the timing of the long-awaited Fed rate hike. Shame on the Fed if they have come to any such conclusion so soon after the announcement. But the market doesn’t trade like it believes it either. They are meant to be data dependent, remember. The roof hasn’t caved in and nothing has been resolved. Central bankers need to take off their sovereign wealth fund hats and separate the S&P from the real economy. Most observers believe that financial stability already is the implicit third mandate and will be looking for the morphine drip. At this point that would be micromanaging at its worst
So what are the immediate risks to the markets? The ECB doesn’t allow the Greek banks to re-open, for one. That the periphery-to-core bond spreads prove to have been too optimistic and the market can’t provide the liquidity for them to move to more realistic levels. I never thought the economic “miracles” in Spain and Italy were as impressive as advertised, anyway, with unemployment rates threatening a lost generation.
But the big risk and one to watch out for is haircuts. Once the reality of debt write-offs and who lent how much and what that means at home, the real fireworks could start. Can Italy, Spain or Austria afford to write-off 1/3 or 1/2 or more of what they lent to Greece? How about the EFSF or ECB? How will depositors feel if they get a quick 30% off the top? That is the biggest issue. The math as they say. And it is what we should be watching for.
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Curious for more? Read The Greek Bluff In All Its Glory: Presenting The Grexit "Falling Dominoes" [7]
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