Risk Aversion Dominates After Greece Votes “No”

Capital markets were expecting a narrow “yes” victory in Sunday’s Greek referendum, the restart of negotiations with its creditors, and the likely end to Prime Minister Alexis Tsipras’s government. Instead investors are faced with a resounding “no” vote victory (61.3% to 38.7%).

European leaders are now preparing to hold an emergency summit tomorrow and an olive branch token from Greece — Greek Finance Minister Yanis Varoufakis resigned. That could possibly pave the way for trust in potential future European Union-Greece discussions.

Initial market impact from Greek developments has been largely negative, with global equities seeing red. Aside from the Shanghai Composite managing to close the day higher to end a four-day losing streak — aided by new Chinese policy measures — risk-averse currency trading (EUR temporarily plummeting to €1.0976, yen and CHF rallying to ¥122.02 and €1.0370, respectively), commodity currencies like the AUD and CAD dollar are weakening, while sovereign bond yields fall (Bunds 0.75% and U.S. 10’s 2.36%).

Greece’s rejection of the bailout terms in Sunday’s referendum considerably reduces the possibility of a deal with its three main creditors the European Central Bank (ECB), International Monetary Fund (IMF), and the E.U. It’s unlikely that the ECB will ramp up emergency lending anytime soon. Meanwhile, the ECB Governing Council will meet Monday, as the likelihood of Greece’s departure from the eurozone has increased significantly.

Market Fallout Subdued

In relative terms, the muted reaction to the possibility of a Grexit would suggest that contagion to the weaker central eurozone (Hungary and Poland) and its peripheries (Italy, Spain, and Portugal) may prove limited. Currently, there seems to be no immediate financial stress in the market, which would imply that the market believes that the ECB has tightly corralled any immediate possible ‘knock on’ effects. Technically, investors have been in the process of reversing the one-directional trade (record short EURs), and they still have more to do.

Current capital market moves have more to do with political jousting rather than financial exposure. Investors, hedge funds, and traders have significantly been reducing their direct exposure to Greece all along. Yesterday’s vote has obviously strengthened the position of the Greek government, but does not solve Tsipras’s immediate two risks – a deteriorating Greek economy and the lack of a mandate to leave the eurozone. Investors seek clarity, and over the next few days, markets will get a better handle on the eurozone consensus rather than trading individual rhetoric headlines.

Unless plenty of constructive comments comes from both the E.U. and Greece investors should expect risk-aversion trading to remain heightened.

Central Banks to Dominate Week’s Proceedings

Central banks are not having an easy go of things at the moment. Should the ECB be providing more liquidity to Greece? What else has the Federal Reserve to do to persuade the market to price in rate normalization? Is the market about to feel the wrath of the Swiss National Bank? Will the Reserve Bank of Australia (RBA) lend a hand to pressure the AUD further?

Besides the Greek bailout vote, Wednesday’s Federal Open Market Committee’s (FOMC) meeting minutes will be the main event of the week. Last month, U.S. policymakers left the door ajar for a rate hike this year, but the market seems to be having some difficulty in aggressively ricing in rate normalization in the U.S. for 2015.

Wednesday’s minutes could go a long way in providing additional insight about the discussions around the possibility of a rate hike and the monetary policy of the Fed in general. Even though Chair Janet Yellen and her colleagues have come a long way on the transparency front, the market is having a difficult time digesting regional anomalies – plummeting Chinese equities, the possibility of Grexit – not delaying the first rate hike stateside. Nevertheless, be prepared for little guidance from Yellen – this is the FOMC event risk.

Expect the RBA to Remain Vocal

Last month, the RBA left its cash rate unchanged at +2%. Current estimates are that the RBA will keep its rate flat later this evening. However, fixed-income traders are pricing in a small percentage chance that Governor Glenn Stevens will reduce the rate again considering the recent developments in Europe and the weakness in China. Aussie policymakers have been very blatant with their market rhetoric – they want a weaker AUD ($0.7492). If the AUD was too strong the RBA would act, however, risk aversion is pressuring commodity currencies and there is not the same sense of urgency. They can afford to wait, especially with the AUD falling to a new six-year low overnight outright (AUD$0.7440). All investors need to worry about is if the RBA does stand pat, how aggressively will the AUD rally?

Market Wary of Swiss National Bank (SNB)

The Swiss National Bank (SNB) is probably in the toughest position. Swiss policy makers will be wary of their historically coveted CHF appreciating (€1.0440) too aggressively, especially in the aftermath of yesterdays No Greek vote. In January the SNB sideswiped the market and scrapped the €1.20 currency cap, which certainly left a bad taste in investors’ mouths.

Nevertheless, their currency is historically always in demand during “fight or flight” situations. However, it has been a prudent move to listen to SNB Chairman Thomas Jordan for directional clues, especially when the Swiss franc remains in such demand mostly from a safe-haven perspective.

The SNB has been intervening in the forex market since it abandoned the EUR/CHF peg five-months ago. Last week the SNB again reiterated that it could still intervene in the forex market, and/or apply more negative interest rates to release some of the external pressures on their currency. Verbal intervention seems to be the first tool of choice to weaken a currency.

Being proactive and vocal would suggest that Swiss policymakers want to discourage speculative “long” CHF positions to accumulate. The SNB acknowledges the “extreme uncertainty” that policymakers have to currently digest, but also admits that the SNB is not unprepared for a Greek default. The SNB has already set a precedent of not sticking to the script. Therefore, owning CHF is not as easy or safe as it once was. Perhaps the SNB is required to go more negative on rates.

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