Chris Weston, Chief Market Strategist at IG Markets
IG’s Greek referendum playbook
For traders, chaos presents opportunities and the current conditions are certainly conducive for many traders. The key themes remain around Greece, data-dependent US policy and the recent swings in Chinese equities.
Figures out of the US have been positive heading into non-farm payrolls and this has kept the greenback bid against the majors. The ADP non-farm employment change showed 237,000 jobs added, which was well ahead of expectations of 219,000. Today will be the official non-farm payrolls release and the market is looking for 231,000 jobs added.
It’s not often we get payrolls data a day early but, with a public holiday in the US on Friday, this has seen data releases accelerate into the break. Given the release is on Thursday, it’ll also coincide with weekly unemployment claims, which are expected to remain steady at 270,000.
Given the US won’t have a chance to react to any Greek headlines for a few days, some US traders may be looking to exercise caution heading into the long weekend. There are some interesting setups in some USD crosses with good gains against some commodity currencies like the CAD and NZD. The divergence is working nicely as the CAD struggles on weaker oil prices and the NZD is hurt by global dairy trade figures that have declined for eight consecutive sessions.
The Bank of Canada and Reserve Bank of New Zealand are two banks which have already been forced into cutting rates in the past by these commodities and declines in oil and dairy will only put pressure on them to ease further.
As a result, I think traders could continue to look for opportunities to buy the greenback against the CAD and NZD.
Heading into a crucial four days for Greece, IG’s Chief Market Strategist Chris Weston has put together some thoughts on the weekend referendum and potential moves in the market.
Background
Alexis Tsipras has his critics, both within the Greek electorate and more significantly abroad, but there are signs he is pulling off a masterstroke with this weekend’s referendum.
Having won the general election in January with a modest 36% of the votes, the Syriza party had effectively been handed a mandate to keep Greece in the union, so he couldn’t simply walk away from the Monetary Union.
Some of the more cynical market participants have suggested Alexis Tsipras was always gunning for a ‘Grexit’, but he needed to be forced out rather than walk away. This clearly hasn’t played out in that vein, although Eurogroup President Jeroen Dijsselbloem has shown huge frustrations with Greece’s tactics and the relationship between all involved is clearly very poor.
The key for Tsipras, though, has been to alter public opinion enough that further austerity imposed by the creditors, in return for funding, is not in the best long-term interests of Greece.
Overnight, we saw Alexis Tsipras reaching out to the creditors with a new proposal, suggesting it was the basis for compromise. However, it was nothing more than out-and-out political tactics as he knew full well it would be rejected. Tsipras clearly felt he could strengthen his hand and win over further support from the Greek voters, many of whom feel he genuinely has the Greek’s best long-term interests at heart.
Still, we go into this Sunday’s referendum with the market positioned for a positive outcome. Is this view misplaced? With positioning, expectations and price action in mind, here are the four most likely scenarios I feel will play out. I also list markets which could have the strongest reaction to these outcomes.
Key times:
The vote is reported to take place between 05:00 and 17:00 GMT (02:00 AEST) on Sunday, so we should have a firm idea on the result for Monday’s Asia FX open at 06:00 AEST.
Vote: Yes. The market seems to be positioned in favour of this, giving it a 75% – 80% probability.
If Alexis Tsipras stays on as prime minister with a renewed focus on gaining creditors’ trust and negotiating a deal:
In my view, this is the most market-friendly outcome as it greatly improves the prospect of avoiding default on its private-sector commercial debt payments due between 10-14 July. The much-publicised €3.5 billion bond redemption to the ECB on 20 July could also be funded, which is key.
Market reaction: Look for EUR to find strong buyers, with EUR/JPY likely to see the most aggressive move in the G10 currency bloc. Relief buying should also be seen in US and commodity futures (08:00 AEST), Asian (including Australian) and European equities. Furthermore, we should see spreads between German and Italian bond spreads narrow, with traders likely to sell volatility (options straddles, EU VIX).
If Alexis Tsipras resigns as leader of the Syriza party, with a technocratic government needed instead:
Given the make-up of the Greek political system, forming a government could be a very messy process and throw markets into a period of confusion. A number of strategists have said this is the most favourable outcome as a technocratic government would naturally increase the prospect of a deal, but will a government be formed in time?
With this in mind, I feel markets will be concerned about the prospect of a missed payment to the ECB on 20 July due to the sheer length of time it could take to form a government.
Market reaction: Expect markets to add risk to portfolios, although this could be tempered by the political uncertainty. In my opinion, the ASX 200 should rally between 0.5% to 1%, with Europe likely to open 2% higher.
Vote: No. The market doesn’t seem to be giving this outcome too much credence, but it absolutely can’t be ruled out.
If Alexis Tsipras gives no clear indication he will use the vote to gain a better deal with the creditors and the markets feel the prospect for a future ‘Grexit’ increases:
This is the worst possible outcome for markets and would throw up huge uncertainties.
Market reaction: Using last Monday’s moves as a guide, I feel EUR/JPY could fall 500 to 600 pips on open, with the JPY in general likely to benefit from the uncertainty. Recall that in periods of uncertainty and volatility, traders flock to currencies associated with a current account surplus. DOW futures could fall 400-500 points, with the ASX 200 potentially opening 3.0% to 3.5% lower. The Italian MIB should see the biggest moves in Europe, potentially seeing a 7-9% fall, with the German DAX not far off.
Look for outperformance from UK assets relative to Europe on this development. Long FTSE, short DAX would be a good trade, in my opinion.
Expect a 150-200 basis-point widening in the spread between German and Italian bond yields.
If Alexis Tsipras uses the vote as a pawn in the negotiating process:
This could lead to initial selling of EURs, US futures and Asian equities, but I wouldn’t be surprised to see shorts being covered as the day rolled on and into European trade. This would depend completely on the rhetoric from both Tsipras and Varoufakis, the key creditor personnel, and whether there was a willingness to negotiate on more favourable terms for Greece. Clearly this development would hand Tsipras a political advantage but will the EU creditor nations react? I am not so sure they will.