Well, we didn’t see that coming, neither did the Institutions (nee Troika), nor the markets. Greece has pulled the negotiations plug at the last minute and put the deal to a national referendum (5 July), which comes after the deadline for payment (1 July). The Eurogroup has said there will be no bailout extension, the ECB has frozen the ELA and the Greek banks are to be closed for the week. That leaves a high degree of uncertainty with regards to payments, Greek Bank solvency and indeed the future of the EUR; not just a Greek exit from the Euro. This will not be solved easily or soon.
FX markets opened sharply lower in EUR, higher in JPY but are relatively steady for now. We believe that a stronger risk off theme may develop through the day. Watch for official measures to ease risk concerns and the Fed has reminded markets of their FX swap arrangement with the ECB. This is to eased demand for US Dollar in periods of stress; expect similar statements from other Central Banks. Where does that leave us? Today is likely to be an uncertain one for financial markets, trying to make head or tail of a situation that is unprecedented. There will be a mass of headlines and speculation. When that happens, there is usually a run to safety. Until now most had assumed there would be a last minute deal; that is no longer possible. The problem is that there is uncertainty about the solvency of the Greek banks. There were withdrawals of about E1bn on Saturday, and ATMs are being rapidly re-filled. The ECB had provided Emergency Liquidity Assistance (ELA) and there was around 1.5-2bn left on Friday.
The question is- if there is no extension nor agreement with the Institutions, then will the ECB continue to provide ELA? The ECB and the Eurogroup has noted that they will ensure the stability of the Euro area (not Greece per se). It is expected that the ECB will provide assistance, but that may come with additional haircuts and be reduced form the levels there had been seen. As of this morning , the ECB appears to have frozen the ELA assistance at June 26 levels; that has required a closure of the banks and equity market for this week. ATMs are to re-open Tuesday with a daily limit of E60 per day. Capital controls are to be announced later today. Note that there are additional payments due in the coming weeks, with a large E3.5bn to the ECB on July 20th, and there have already been delays of payments to Greek pensioners. This might broaden and there is likely to be stress within Greece, not just to external creditors.
Risk aversion. This is not like before. We have had a slow bank jog in Greece and most thought that there would be an agreement eventually, at the last minute. That is no longer true. We’ve been using the term ‘crisis’ loosely for some time now but really, it wasn’t. Now is crunch time. And Tspiras has inflicted the first blow, assuming all sides would cave in: they no longer can, which probably means that the inverse relationship between European equities and EUR breaks down. This is bad for both in the short term. The speculative market, and likely others, had reduced their EUR shorts from the extreme in April to around half that. There is scope for a broad section of the market to short the EUR through this, than just those exposed to the equity market (and their hedges). Personally I think the Euro will not weaken too much from here, especially if Greece does exit the Euro will be much stronger.
This morning on the economic front we have UK Mortgage Approvals and Money Supply at 9.30 am. This is followed at 10.00 am by Euro-Zone Economic/Business/Industrial/Services and Consumer Confidence. At 1.00 pm we have German CPI. Finally this afternoon we have US Pending Home Sales and the Dallas Fed Manufacturing Index at 3.00 pm and 3.00 pm respectively.
June S&P 500
The S&P had a very whippy trading session on Friday. Thankfully we had a late rally into the close as the market having dropped to a 2086 low which saw me go long the market at 2089 before been able to cover this position near the close at 2095 as outlined earlier to my Platinum Members and I am now flat. So far this morning the S&P is holding the key 2060/2070 major support. Last night the S&P opened with a very large ‘Down Gap’ and I would expect some of this 27 ‘Handle Gap’ to be filled after the US Markets open this afternoon. For this reason I will be a small buyer today from 2062/2068 with a 2055 stop which is just below the overnight low. If I am taken long and subsequently stopped out of this position I will use my ‘5 Handle Rule’ to go long again with a stop below whatever new low is printed. My only interest in going short the market is on a rally higher to 2092/2097 with a 2103 stop.
EUR/USD
My Euro plan also worked well on Friday as after the Euro traded lower to my 1.1140 buy level, thankfully the Euro had a nice rally into the close which enabled me to cover this position a 1.1175 as I did not want to have a position over the weekend. As I mentioned in the economic commentary above I believe that a Greek exit will be good for the Euro and I certainly would not start to short the Euro at these levels. Last night the Euro was trading below 1.10 but this morning we are back at 1.11 as the Swiss National Bank are rumoured to be on the buy side. Today I will be a small buyer on any dip lower to 1.1000/1.1050 with a 1.0950 stop.
September Dollar Index
Thankfully the Dollar high was only at 95.87 which just missed my 95.90 sell level before opening with a large Gap higher on the Greek news and I am still flat. Today I will again look to go short from 96.30/96.60 with a 96.95 stop.
September DAX
The last time that I saw the DAX open with a 600 point gap to the downside was after nine/eleven. Thankfully we were flat over the weekend as just like most market participants I did not see this event happening. To me the move lower in the DAX is an over-reaction and I certainly would not be chasing this market lower at these levels. Today I will be a small buyer on any dip lower to 10920/10970 with a wider 10790 stop. Given the volatility I am trading in smaller size with a wider stop.
September FTSE
My long 6730 FTSE position from early Friday morning was stopped out for a small loss at 6695 soon after I posted and I am now flat. Incredibly the FTSE has traded lower overnight to a 6470 low print before recovering. Today I will again look to buy the market on any dip to 6500/6540 with a 6460 stop. Given the huge move lower this morning I do not want to be short the FTSE at this time.
September BUND
I was extremely unlucky with my BUND plan on Friday as shortly after the markets opened the BUND traded lower to my 150.45 buy level before stopping me out of this position near the lows of the day at 149.95. This morning the BUND has opened 200 points higher at 152.90 before again selling off and I am still flat. Today I will be a small seller on any rally back to 152.10/152.50 with a 152.80 stop.
Gold Rolling Contract
No change as I am still a small buyer on any dip lower to 1162/1168 with a 1155 stop.
Silver Rolling Contract
No change as I am still long at 15.90 with the same 15.50 stop.
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