Financial Markets in Controlled De-risking

Following the announcement of the referendum to decide whether the Greek people will accept further austerity measures, markets expectedly sold off albeit they held off better than expected. Top European figures including Commission President Junker and German Chancellor Angela Merkel are hailing the vote to be more of an in-out decision.

In terms of price movements, the Stoxx 600 recovered slightly over the course of the session after opening nearly 3.5% lower at the open, eventually ending -2.69% at the close. There were similar moves for both the DAX (-3.56%) and the CAC (-3.74%), while the bulk of the pain was felt in the periphery where the IBEX (-4.56%) and FTSE MIB (- 5.17%) both tumbled.

The Greek equity market was closed yesterday however indications coming out of US ETF tracking Greek stocks tumbling 19% and another Athex ETF falling 15% before trading was suspended.

In a live interview on a Greek TV station, PM Tsipras was typically defiant saying that ‘the referendum will give us a stronger negotiating position when the talks resume’ before then going on to say that the higher the participation and number of people voting ‘no’, the stronger the government’s position will be. He also hinted that should a ‘Yes’ vote pass he would most likely give up his post as leader.

In the US yesterday the negative momentum continued into the session where the moves were in fact enough to take US equities back into negative territory year-to-date. The Euro is down around 0.55% against the Dollar to $1.117/€ as of this writing.

Over in China meanwhile and after another volatile session yesterday the index has followed up this morning with another hugely volatile session. Having fallen as much as 5% intraday, the Shanghai Comp closed 5.53% higher.

In credit we saw weaker bids across high yield with the Crossover (+48bps) and Main (+10bps). There was a predictable sell-off in the peripheral sovereign bonds meanwhile, although much of the move was fairly orderly. The risk-off tone extended into the US where we saw 10y Treasuries eventually end -14.8bps tighter at 2.325%.

As if the drama in Greece weren’t enough, Puerto Rico is also generating some default-related headlines too after Governor Padilla said that the nation will look to delay payments on the current debt load of around $72bn for ‘a number of years’, while also seeking a debt restructuring plan.

Greece will remain the focus of the news for the time being however we expect some important economic data out of the Euro area with the CPI print for June already out, coming in at 0.2% down from 0.3%; indicating that the ECB has lots of work to do to reach its medium term inflationary target of 2%. Meanwhile we also get German retail sales and unemployment data, as well as French consumer spending and the final UK Q1 GDP print today.

Over in the US this afternoon, the May Chicago PMI is due, as is the ISM Milwaukee, S&P/Case Shiller house price index and June consumer confidence reading. The IMF repayment for Greece is due today and given the likely scenario of non-payment, there will be much focus on whether or not we see subsequent cross-default provisions triggered.