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Markets on shaky ground

The political events that transpired over the weekend are setting the stage for an eventful week ahead, with the uncertain ground sending market participants into a state of panic as investors scramble to position themselves accordingly.   The holiday-shortened trading week will do little to help with liquidity, as Canada Day on July 1st and the bank holiday for the United States on July 3rd in observance of Saturday’s Independence Day will likely encourage heightened volatility.   The elevated levels of volatility to begin the new trading week were first witnessed during Asian trade, where over the weekend the Peoples Bank of China unleased a double rate cut bazooka in an effort to stabilize a struggling equity market and shore up personal finances.   The unexpected interest rate cut was the fourth in seven months, lowering the benchmark rate by an additional 25bps while at the same time slashing the reserve requirement ratio rate by 50bps for banks which lend to SMEs.   The relief to the stock market that was provided by the PBoC’s double rate cut was short-lived, as market participants were skeptical as to the Government’s motives behind the stabilization attempt, as the perception was that the actions from the ruling party were an effort to prop up the equity market as opposed to support the overall economy.   The result was that the initial pop higher in Chinese equities gave investors a chance to reduce exposure, sending the Shanghai Comp down 3.29% on its session and officially into bear market territory after having shed over 20% from the high witnessed on June 12th.

Sentiment has fared little better during the European session, with the breakdown of Greek debt negotiations over the weekend weighing heavily on higher-yielding asset prices as investors seek out safety.   Essentially, Prime Minister Tsipras and the Syriza government have called a referendum on July 5th to decide on whether the Greek population is willing to accept the conditions of a second aid package extension that official expires at the end of June.   The interim result is that there will be no further negotiations ahead of the referendum as Greece’s creditors have already submitted their final offer, and it now appears Greece will miss its bundled IMF payment tomorrow that would technically send the country into default.     In addition, the ECB has decided not to increase the Emergency Liquidity Assistance window for Greek banks, and given the deposit flight, has forced the closure of Greek banks and the stock market this Monday.   It is uncertain when the Greek banks will re-open from their mandatory bank holiday, but it could be possible the disruption lasts until the referendum on July 5th.   There have been reports that if the Greek banks do reopen, capital controls will be enforced and the withdrawal limit will be €60.

The fog of uncertainty around banking closures and what the outcome of Sunday’s referendum will have on Greece’s future within the Eurozone led to the euro falling off a cliff when currency markets openedSunday evening, though the common-currency has been able to recover the majority of its losses on additional central bank intervention by way of the Swiss National Bank.   The President of the SNB confirmed that due to the increased demand for francs as a result of the instability in Greece, the central bank stepped into the market to stabilize the situation by buying euros against the franc and greenback.   The selling pressure in the franc helped the euro recover almost all of its earlier losses, grinding back to just below where it closed on Friday.   While the efforts of the SNB have achieved stabilization in the euro for now, market participants should be bracing themselves for rough waters in the coming week, as the likelihood of a “Grexit” continues to gather momentum.   For corporates that have euro exposure, make sure to speak to your dealing teams to devise a strategy to capitalize on the trading conditions that are likely to result from heightened levels of volatility, as Non-Farm Payrolls and the looming Greek referendum will make for some choppy trading conditions.

As we get set for the opening bell in North America, equity futures are telegraphing a substantial gap lower as trading gets underway today, though futures are off their earlier lows.   The hydrocarbon complex has also felt the sting of the stampede into safe haven asset classes, with front-month WTI to pivot around the $59 level.   The loonie is slightly lower against the greenback as the North American session gets set to kick off, following oil lower and participants await the release of Pending Home Sales in the US over the month of May at 10:00EST.   While there is the likelihood we could see a knee-jerk reaction in response to the release of Pending Home Sales in a few hours, all eyes will be on any emerging Greek headlines, and the resulting polls to estimate how the Greek’s will vote in response to the referendum Sunday.

Further reading:

Junkcer aggravates the crisis with suicide comment and questionable observations

Greece End-Game: 40% To Grexit, 40% To Contagion – UBS

Scott Smith

Scott Smith

Scott Smith is a Senior Corporate Foreign Exchange Trader with Cambridge Mercantile Group and has a diverse background in the foreign exchange industry, with previous experience in both credit and trading related functions. Scott holds a Bachelor of Commerce degree from the University of Victoria, has completed all three levels of the Chartered Financial Analyst designation, and is currently working towards the Derivative Market Specialist certification offered through the Canadian Securities Institute. Cambridge Mercantile Group.