Greece Rejects Austerity

Daily Analysis - 06/07/2015

Referendum Results Show A Resounding Victory for the “No” Vote

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The Greek voting electorate came out strongly in favor of rejecting further onerous bailout conditions, voting “no” to more austerity, supporting Prime Minister Alexis Tsipras’ negotiating position with creditors. This raises the stakes for a potential exit despite the Greek desire to stay in the Euro.

Greeks Say No

In a startling turn of events, Syriza scored a major victory overnight as the vote tally showed over 61% of Greek voters choosing “no” at the referendum, throwing Europe into disarray as leaders scramble to ring fence economies from contagion. In another stunning move, firebrand Greek Finance Minister Yanis Varoufakis resigned from his ministerial post in an effort to help Tsipras head back to the negotiating table with creditors. The overwhelming vote against austerity and further spending cuts might help Greece finally alleviate the lingering debt problem through haircuts and debt relief. This is a great victory, but throws the situation into chaos with creditors not sure how to respond. Meetings will be conducted throughout today’s market session as policymakers discuss options including parallel currency issuance and further bank financing. The Euro reopened to over 100 pips in losses before recovering overnight, managing to rally back above 1.1000 after experiencing substantial volatility.

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Equity Futures Tumble

Futures have sold off heavily since the overnight reopening as risk assets tumble in the wake of the Greek referendum. Although no clear course is set for the nation as sell-side analysts contemplate the nation remaining in the Euro Area or exiting, traders moved into “risk-off” mode as uncertainty reigns supreme ahead of Eurogroup meetings. The most pain was felt in the Dow futures, hitting the lowest levels since early January. European benchmarks were severely impaired by the announcement, with the DAX 30 and CAC 40 futures contracts hitting lows last seen in mid-February as the Greek situation raises the stakes for expanded quantitative easing measures from the European Central Bank. The Nasdaq managed to avoid most of the carnage as the heavy technology weighting helped the benchmark outperform peers on a relative basis. Moreover, stocks in China have seen a particularly volatile trading session after the PBOC intervened to prop up equity markets.

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Crude Oil Dives

Major crude oil benchmarks tumbled below critical support levels, breaking out from a two-month range as fears of contagion coupled with a slowdown in Asia saw renewed pessimism in the oil patch. Brent crude oil fell below $60 per barrel as West Texas Intermediate briefly fell below $55 per barrel before rebounding higher. The spread between the instruments has also narrowed after widening past $5.00 last week, currently trending near $4.70. With the confluence of factors contributing to a market already ignoring equilibrium conditions, the recent slide in prices might be the beginning of the resumption of the prevailing longer-term downtrend. Renewed growth in drill rigs and continued gains in output from the major producers has seen the oversupply claim resurface as OPEC keeps production targets unchanged. Meanwhile natural gas is also trending lower, with the Henry Hub retreating -0.74% to 2.750 per MMbtu.

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GBPUSD Equidistant Channel Technical Pattern

The safety bid is back on in force as haven assets such as the US dollar benefit broadly from the uncertainty facing Europe. The longer negotiations draw out, the more likely an exit scenario for Greece which could spark another round of contagion, seeing risk aversion instruments like the Franc and Gold also gain momentum in concert with the US dollar. The Pound has also fallen on the news as the UK races to prepare and implement the new austerity budget, with GBPUSD trending steadily lower after touching the highest level since 2014 in June. The equidistant channel pattern setting up in the pair has a bearish bias with ideal positions taken near the upper channel line targeting the lower channel line. Fighting the prevailing near-term downtrend sees risks increase while potential reward shrinks.

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