The entire financial, political, and economic world has had their eyes on Greece during discussions over the future of the country and this weekend marks a significant moment in those talks. As Greece closed their banking system temporarily we saw Asian stock markets plummet Monday morning with worries about the effect on the global economy and financial system.
The euro slipped 1.5 cents compared to the U.S dollar, the Japanese stock market fell 2.5% in early trade, the South Korean market fell 1%, and the Australian market went down 1.5% (which amounts to over $35 billion in lost value). On the other side, the Chinese stock market actually grew 2.4% in early Saturday trading due to interest rate cuts; though this was not enough to offset the nearly 8% plummet Friday.
While it was not out of the question that Greece’s government would call a national referendum, the speed at which it was executed caught many off guard who expected some type of deal to be cut. It is unclear exactly how long the banks will remain shut, though the general consensus is pointing to a week-long hiatus.
As is common in times of financial uncertainty, the price of gold climbed $12 per ounce as investors sought security.
Overall, the worst case scenario could lead to global stock markets falling up to 2% today.
GREEK VOTE: HOPE FOR THE BEST, PREPARE FOR THE WORSE
It was September 29, 2008, early afternoon, as the U.S. House of Representatives was voting on what was commonly referred to as the “bank bailout.” The situation had been made clear by Fed Chair Bernanke and Secretary Paulson to Congress what would happen if the vote was denied; after all, Lehman Brothers had just collapsed and sent the markets into turmoil, and without government backing, there would be more investment banks to fall.
Trading floors were quiet during the vote. The assumption was that this bill would pass; if they had not had the appropriate votes, then it wouldn’t have been brought to the floor for a vote. Just prior to the vote, Speaker Pelosi made a partisan speech condemning conservative policies of Greenspan ,and Republicans and many congressmen revolted and changed their vote, thus defeating the bill.
By the time trading floors were waking up, the financial markets reacted rudely to the surprise; and, looking back, it seems amazing that the DJIA only lost 777.68 points that day. The point is to never assume how any legislative body will vote.
Back To The Future
This year when the S&P 500 (^GSPC:SNP) has reached the top of its range, it has done very little to nothing to extend that upside range, with price often failing and sellers rushing into the markets.
Now, it seems money is less confident than in it was in 2013 and 2014; the political scene is less stable; rate hikes that have been anticipated all year will most certainly come by the end of the year; and the brink of a political season that will determine which parties control the White House and U.S. Congress have left the market with less convicted buyers. This has been witnessed by the noticeable MOC (market-on-close) sell imbalance in the cash markets through the spring and summer, as well as Index ETF flows that have seen money flowing out and staying away.
All these uncertainties combined with a very unstable situation in Greece right now provide an environment in which cautious money can become scared money very easily and quickly. It was just last month we remembered the 5-year anniversary of the flash crash, an event day which was prompted by riots in – where else but – Greece. There remains potential for greater unrest as the Greek banks are closed for another week and the maximum allowed withdrawals are a very modest sum.
MrTopStep’s purpose is not to attempt to promote fear or inject senseless drama into the minds of our readers; but the financial world has been watching the Greek problem for more than 5 years now observing consistent instability and no real long-term solution. I will repeat Danny Riley’s words to me concerning last night’s 40-handle drop on the contract open – that it “was long overdue” – and may I add that this could just be the beginning.
Traders, also keep in mind that weekend book squaring and hedging will be concluded by Thursday with the major equity cash markets closed on Friday in observance of the July 4th holiday, while the ESU15:CME will trade until noon Central on Friday.
The stats this week may not be particularly useful when considering the volatile headline risk but historically the trade surrounding Independence Day is strongly bullish with June closing firm and the first days of July very strong.
In Asia 11 out of 11 markets closed lower, and in Europe 10 out of 11 markets are trading lower this morning. Today’s economic calendar includes Pending home sales, Dallas Fed Mfg survey, 4-week bill announcement, 3-Month Bill auction, 6-Month Bill auction, and Farm Prices.
Our View:
The Greek government is doing exactly what I thought they would, default. The damage to the ESU was a -40 handle day. The S&P’s traded down to 2054, then up to 2079, and last they are at 2073.25. Total volume is over 400k contracts. We can’t rule out a selloff / retest, but we think most of the damage has been done. The European creditors are out $43bil and most of the banks that have exposure have already prepared fo the worst. Sell the early rallies, buy the dips, and get ready for the rip!
- In Asia 11 of 11 markets closed lower: Shanghai Comp. -3.34%, Hang Seng -2.61%, Nikkei -2.88%
- In Europe 11 out of 11 markets are trading lower: DAX -3.42%, FTSE -1.68%, MICEX -0.59%, GD.AT –% at 7:00 am CT
- Fair Value: S&P -8.11, Dow -97.3, Nasdaq -8.73
- Total Volume: 1.3mill ESU and 4.8k SPU traded
- Economic calendar: Pending home sales, Dallas Fed Mfg survey, 4-week bill announcement, 3-Month Bill auction, 6-Month Bill auction, Farm Prices.
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