Global equity markets were drowning in a sea of red last week as the major European equity indices sold off sharply on Monday, following the weekend’s announcement by the Greek government to hold a referendum on the deal being offered by its creditors. The FTSE Eurofirst 300 closed down 3.54% for week, while the German DAX index lost 3.8%, with the index now down 11% from the high reached in April.
Core government bonds were in demand amidst the turmoil with the German 10-Year government bond yield declining to 0.79%, down 13bps for the week. Oil prices suffered a sharp fall with increased US supply cited as the main factor. Meanwhile, the Chinese stock market is now bordering on the ridiculous, with the Shanghai Composite Index dropping a further 12% last week.
European equity markets have opened sharply lower following a ‘No’ vote in the Greek bailout referendum yesterday. Yanis Varoufakis, Greece’s finance minister, has resigned to help the Prime Minister reach an agreement, after certain parties requested his ‘absence’ from the meetings. “I shall wear the creditors’ loathing with pride” he wrote in his resignation blog post “Minister No More”. The man has panache!
The Troika (EC/ECB/IMF) backed the Greeks into a corner and so I’m not surprised by the ‘No’ vote. This majority victory for the Greek government now forces the hand of the Troika as they look to stem concerns about European disintegration. If they do not concede, and the ECB are unwilling to provide increased liquidity to the Greek Banking system it seems inevitable that Greece would be forced to leave the Euro. This is uncharted territory so it is merely speculation on how contagious the fallout will be. (There is no legal mechanism to kick Greece out of the Euro so they would have to be forced out by an unwillingness on the part of the Troika to help them.)
The Euro appears to be holding up, currently trading at the $1.10 level against the US dollar, but this may have more to do with the fact that the Euro has become a funding currency for traders. The unwinding of trades based on borrowed Euros requires the buyback of Euros, hence providing some support for the single currency
Countries like Italy, Portugal and Spain should be most worried. Ireland seems to have moved up a notch from the other “PIGS” but sentiment can change quickly. The preferred option is that a meaningful deal is reached quickly, but the way it has played out publicly means that there are now too many egos involved for a compromise to be reached. The general consensus in the market is that this crisis can be contained to Greece and won’t spill over into the wider financial system, with the widespread belief that “this is not a Lehman Brothers moment”. Only time will tell whether this attitude is naïve, as nobody knows with certainty how this will play out.
Either way, the burden will once again fall on Mario Draghi and the ECB to navigate Europe through this festering crisis.