showtime soon enough, anybody in the mood to play with GREK...
........
key implications;
· Our view is that a referendum is likely to result in Greeks accepting the proposal by European creditors. Polls before the referendum was announced indicated that roughly 57% of individuals supported accepting the proposals, a figure which has consistently held above the 55% mark. The additional uncertainty this week created by capital controls is likely to tip the scale further in the direction of accepting creditors' proposals. The Greek economy remains very cash-driven and the bank holidays will disrupt economic activity to a greater extent than they would otherwise in other countries.
· In terms of contagion risks, this is far from 2012. In the near-term, the euro area will likely survive any potential outcome from the current crisis in Greece. Exposures of European Banks to the Greek banking system have been significantly reduced. A large majority of Greek public debt is owned by official European creditors. The ECB has the ammo to quell rising volatility. Should peripheral bond spreads widen materially, the ECB's current QE program could be front-loaded into July and August. Furthermore, the ECB could also resort to the OMT if necessary. As stated in a press release yesterday, "The Governing Council is determined to use all the instruments available within its mandate".
· Markets are aware of this and moves have been limited so far considering the circumstances. Portuguese 10-year yields are up a relatively modest 28bp, and Spain and Italy's are up only 19bp, magnitudes lower than in 2012. The EURUSD, after falling as low as 1.09 in early trading, has since rebounded to 1.11. Euro softness relative the safe haven JPY and CHF has been more pronounced. The Swiss Central Bank has confirmed intervening in the market to limit CHF appreciation. All things considered, the euro is likely to remain range bound unless the likelihood of a Grexit materially rises, in which case, the EURUSD could easily retest its 2015 lows of 1.05 or less. If the exchange rate were to fall significantly below parity, we could see coordinated G7 central bank action to support the currency.
· Market attention will also turn to the Fed, and whether Greek-related uncertainty reduces the prospect of a September rate hike. Ultimately, this will depend on the persistence and extent of the uncertainty. NY Fed president Dudley stated on the weekend that a September rate hike (our base case scenario) is "very much in play". This is still the case today, and will remain so, unless the volatility in Greece spreads over several weeks and materially impacts European growth prospects.
'i got this'
........key implications;
· Our view is that a referendum is likely to result in Greeks accepting the proposal by European creditors. Polls before the referendum was announced indicated that roughly 57% of individuals supported accepting the proposals, a figure which has consistently held above the 55% mark. The additional uncertainty this week created by capital controls is likely to tip the scale further in the direction of accepting creditors' proposals. The Greek economy remains very cash-driven and the bank holidays will disrupt economic activity to a greater extent than they would otherwise in other countries.
· In terms of contagion risks, this is far from 2012. In the near-term, the euro area will likely survive any potential outcome from the current crisis in Greece. Exposures of European Banks to the Greek banking system have been significantly reduced. A large majority of Greek public debt is owned by official European creditors. The ECB has the ammo to quell rising volatility. Should peripheral bond spreads widen materially, the ECB's current QE program could be front-loaded into July and August. Furthermore, the ECB could also resort to the OMT if necessary. As stated in a press release yesterday, "The Governing Council is determined to use all the instruments available within its mandate".
· Markets are aware of this and moves have been limited so far considering the circumstances. Portuguese 10-year yields are up a relatively modest 28bp, and Spain and Italy's are up only 19bp, magnitudes lower than in 2012. The EURUSD, after falling as low as 1.09 in early trading, has since rebounded to 1.11. Euro softness relative the safe haven JPY and CHF has been more pronounced. The Swiss Central Bank has confirmed intervening in the market to limit CHF appreciation. All things considered, the euro is likely to remain range bound unless the likelihood of a Grexit materially rises, in which case, the EURUSD could easily retest its 2015 lows of 1.05 or less. If the exchange rate were to fall significantly below parity, we could see coordinated G7 central bank action to support the currency.
· Market attention will also turn to the Fed, and whether Greek-related uncertainty reduces the prospect of a September rate hike. Ultimately, this will depend on the persistence and extent of the uncertainty. NY Fed president Dudley stated on the weekend that a September rate hike (our base case scenario) is "very much in play". This is still the case today, and will remain so, unless the volatility in Greece spreads over several weeks and materially impacts European growth prospects.
'i got this'
