Greece – Market response mixed as investors expect the expected

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Stock markets sank this morning, following the Greek government announcement that it would hold a referendum on Sunday, 5 July on whether creditor proposals should be accepted or not.

Negotiations broke down this weekend, after the Eurogroup and ECB rejected the Greek government decision to hold a referendum on the proposed austerity measures, the ECB subsequently froze the ceiling on Emergency Liquidity Assistance to Greek lenders below €89bn.

While Greek banks and the stock market were closed and capital controls were issued, global markets responded with mixed signals. The DAX, FTSE, Cac40 and Eurostoxx all declined significantly. Yet while stock markets opened lower, they did not collapse dramatically, suggested that markets had already anticipated the events.

Bond markets reflected divergence, with German ten year bunds opening with a 0.7037% yield, Spanish and Italian yields shot up initially but declined gradually throughout the morning.

Salman Ahmed, global strategist and portfolio manager at Lombard Odier comments: “The main factor to consider when assessing the current situation is that this is not 2011/12. The eurozone has moved significantly since the last serious episode of the ongoing debt crisis with a multitude of strong backstops now in place.”

“Secondly, direct financial linkages of Greece are much more concentrated this time around. For instance, around 80% of foreign claims on the Greek economy are now residing with official institutions, thus limiting the direct impact on the global financial system. In essence, the current situation is more about political credibility of the eurozone rather than direct financial implications of a Greek default” Ahmed adds.

This sentiment is endorsed by Christophe Bernard, chief strategist at Vontobel Asset Management: “We are the opinion that the ECB has built powerful firewalls to mitigate any potential contagion effects from Greece to the periphery, and that the improving macroeconomic data across Spain, Ireland, Portugal and Italy provides a constructive background to contain any potential fallout from the Greek crisis. As a result we maintain our overweight equity on the one hand and significant underweight government bonds on the other hand.”

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