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FUNDAMENTAL ANALYSIS

Grexit Fears Back on the Agenda

Grexit Fears, Back, Agenda, European Government, US Dollar, fundamental analysis, fx trader, forex

15 Jun 2015

Last week was a bit of a rollercoaster with a mid-week rally (on not much news at all to be honest) sandwiched by nervous trading at the start of the week as European Government bonds sold off and at the end of the week as Grexit fears ratcheted higher. Western equity and bond markets were little changed by the end of the week which obscures the underlying fragility, with wider junk bond spreads and a weaker US Dollar indicating that all was not well.

Having avoided writing about Europe for some time now, with Greece dominating headlines as the week ended, we feel compelled to make a few observations.

It appears on the surface as if all three parties (Greece, the EU institutions and the IMF) have fairly entrenched positions or red lines and that a short term sticky plaster solution (never mind a long term viable solution) is simply not possible unless one party backs down. The IMF are only allowed to lend to solvent countries that have a viable fiscal plan. They felt compelled to distance themselves from talks in Brussels this week as they claim the Greek fiscal proposal is simply not viable. The Greeks claim that their creditor’s proposals are not acceptable nor offer any hope to the Greek population that they can begin to grow their way out of what can only be described as a debilitating depression. EU institutions and Germany are seemingly not willing to lend any more money to Greece without greater reforms including asking the Greek government to abandon promises made to voters during the election earlier this year.

Simply put, unless one side backs down then it would appear as if Greece has no choice but to default and probably leave the Euro. If this happens (and we don’t know any better than the next man whether it will or not) we are told by policymakers that the fallout can be contained. Our view is that losses would be huge, albeit shouldered mostly by taxpayers, and that nobody really knows what the short term or long term implications will be. Of course, with the ECB printing money, policymakers will hope that markets would take Grexit calmly. There would, however, likely be higher volatility than investors would be comfortable with in the short term. In the long term, the inherent flaws of a currency union without political union could cause risk premiums to rise again in the periphery and ultimately bring the entire currency union into question.

So with Grexit fears back on the agenda along with the fears we have been discussing for a few months now in our investment commentaries, what of the short term view on markets? Last week, we highlighted 2092 support levels in the S&P 500 that, if broken, would increase our nervousness. Well, just as the selling early last week had the look of turning into something more serious, equity markets steadied and rallied off support. This market action has now reinforced first support in the 2070/80 area as indicated in the chart below.

Grexit Fears, Back, Agenda, European Government, US Dollar, fundamental analysis, fx trader, forex GRAB

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