The verdict is in, and a in a resounding landslide victory, the Greek people have chosen to turn their backs on the last bailout extension offer from the Troika, choosing to brave the short-term economic abyss as opposed to withstand further austerity measures. Though we have mentioned here before that a ‘No’ vote would not automatically result in expulsion of Greece from the monetary union, the risks are now more pronounced of this materializing given the roadmap (or lack thereof) ahead. The near-term implications of the referendum results are that Tsipras will be back at the negotiating table with the Troika to try and resurrect the smouldering ashes of Greece’s second bailout programme, though while his political hand has strengthened, we are skeptical the creditors bend as a result of the weekend’s developments and make the sort of concessions that Greece is looking for. While the Syriza government may have generated some bargaining clout given the size of the ‘No’ vote combined with last week’s IMF report that some debt relief is necessary for a successful third bailout program, the moral hazard issues for the Eurozone suggest that we are still a long ways from a resolution.
Arguably the most important near-term event will now be the ECB’s decision on the Emergency Liquidity Assistance (ELA) facility for Greece, as bank liquidity will likely be fully exhausted over the next few days. At this point it seems likely for the ECB to maintain the current ELA cap, as increasing the collateral haircuts would exacerbate the already precarious position and force the banking system into insolvency, while raising the ELA facility from current levels is akin to “throwing good money after bad” given there is no current bailout program for Greece. Maintaining status quo of the ELA is not in the best interest of the Greek government as banks are close to running out of notes at the ATM, and in a few days the government might have to issue California-like IOU’s as a form of parallel currency in order to meet their near-term obligations. The ELA is a lever the ECB could use from a bargaining perspective as the lack of liquidity will continue to crush domestic business, but the bank holiday last week leading up to the referendum seems to have little effect on the overall population from a political standpoint.
The fallout from the referendum result is a distinct risk-off appetite in financial markets, with the euro sliding across the majors as uncertainty around Greece’s future within the zone percolates. However; the initial flight to safety seems to be well contained for the time being, and the general feel to the market is less panicky as opposed to calculated cautiousness, with equities managing to pull off their earlier lows. The sacrificial resignation of Greek Finance Minister Varoufakis has also helped to stem a portion of the rotation away from euro-denominated assets, though we note that during the home stretch of the negotiations Varoufakis had already taken a backseat in the talks and still both sides could not come up with an agreeable deal. In short, the Greek saga is far from over, and while we are likely to experience continued volatility in euro over the coming weeks, the associated fall out after the decisive ‘No’ vote suggests markets are better positioned and more insulated from the slow-moving train wreck that is Greece.
Outside of Greece, the rollercoaster that is the Chinese stock market continues at breakneck speed, as the government announced that the central bank would inject capital into the China Securities Finance Corp, which in turn will lend money to brokerages and mutual funds to buy stocks in order to stabilize the market. At the same time, the suspension of impending IPOs has also been used to free up capital in order to support the market, though the market response was less than stellar after the new measures were announced. The Shanghai Comp that represents larger capitalization stocks managed to finish its session up by 2.4%, though off its earlier highs as participants used the rallies to unwind positions and sell into the upticks. The failure of the measures to ignite gains outside of the largest state-run companies does not bode well for the overall health of the market, suggesting there is further leveraged positions that still need to be unwound and are waiting for rallies to do so.
As we get set for the North American open, equity futures are well situated in the red before the opening bell, while the hydrocarbon complex is displaying a strong offer tone with front-month WTI dropping to the $54 level. The loonie is seeing increase downward pressure as it falls victim to a rotation out of high-yielding assets, while being dragged down by the soft performance in energy markets. Later this morning the Ivey PMI survey for the Canadian economy will be released for the month of June, and while the survey isn’t typically a market mover, will serve to kick-off a busy week for Canadian data ahead of next week’s Bank of Canada meeting.
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