With the market turmoil from a Greek decision to miss its payment to the International Monetary Fund (IMF) resulting in excessive moves, it’s worth pointing out where the biggest risks for traders and brokers are. Currently, we are seeing a regular trading day for the euro, but a rather volatile one for European stock CFDs.
With the German DAX and other European indices sliding more than 6 percent, brokers offering 1:100 or higher leverage on these instruments could take some measures to reduce both their and their clients’ exposure.
Stock markets volatility is aided by the uncertainty surrounding the Chinese economy, where the central bank has reduced interest rates in an effort to arrest a rather sharp stock market decline. That said, Chinese stocks have extensively rallied over the past months and are due for a correction.
Just Like a Regular Trading Day in 2008-2009
If anything, the current financial markets reaction reminds us of the Dubai World disaster in 2009, when the local government-owned investment company had to ask for a six months extension on its payment of $26 billion of debt. The private exposure of financial institutions to Greek debt is not substantial and is not resulting in a liquidity squeeze for the time being.
Greek banks will remain closed today as the European Central Bank has denied the provision of additional liquidity, and the Greek government has implemented capital controls.
AxiTrader just became the latest broker to warn its clients about extraordinary trading conditions. The company relayed in a statement to its clients that margin requirements on currency pairs, including the EUR and some stock indices, may be increased from current levels in order to align with fundamentals, such as increased volatility and reduced liquidity on the respective markets.
A couple of brokers with whom Finance Magnates’ reporters spoke to early this morning shared that trading was going on as usual with increased volumes in EUR currency crosses. If anything, the single European currency is on its way for a big rally, now that the uncertainty resulting from the behavior of Greek politicians is out of the way.
To put the currency moves into perspective, the euro has lost about 15 cents of value since the announcement of early elections in Greece last December. The currency market has turned out to be the best discounting mechanism for the Greek storm which is hitting financial markets this morning.
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While the euro is slowly recovering from about a 1.5 percent drop early in Asia and gaining ground into the London open, European indices are likely to remain volatile in the face of an eventual Greek default. While credit agencies are not considering a non-payment to the IMF a default, private investors will eventually need a payment from the crisis-stricken Greek government.
Outlook for the Referendum next Sunday
The key road ahead for the country is the mandate which the people will give to the current (or future) governments. If the referendum results in a “yes” vote, which will mean a conciliation to demands of creditors for structural and fiscal reforms, the country is most likely to remain a Eurozone member despite it missing a payment to the IMF.
Analysts from Barclays wrote in a research note this morning, “In the event of a “yes” vote, we think that it is highly likely that Greek PM Tsipras and possibly the entire government would step down, even if other options are also possible, such as PM Tsipras staying in power and accepting the deal with the Institutions.”
“The new government would re-engage with the Institutions to sign an agreement as per the mandate given by the referendum. Snap elections would remain a possibility in this scenario, but probably not until after the summer. Market reaction would likely be positive immediately after the referendum,” the note elaborates further.
Argentinian Scenario Only If “No” Vote
A “no” vote by the Greeks would most likely bring additional financial markets volatility. Barclays research explains, “Without the support of a programme, a potential exit scenario would resemble Argentina’s 2001-02 crisis, which also started with deposit controls but – in the absence of an internationally supported plan – rapidly deteriorated into tighter controls and a forced currency conversion.”
Back in 2001, the Argentinian sovereign debt crisis triggered substantial financial markets volatility with bond market conditions deteriorating. The situation in the aftermath of the Greek crisis on our hands is so far contained, albeit peripheral bond markets having been punished, while flight to quality is benefiting the German bund.
If traders are looking into the euro trade, they would need to pay close attention to the yield spreads between European sovereigns. Currently, the German 10-year bund yield is trading at 0.74 percent, with Spain and Italy moderately higher at 2.34 and 2.4 percent. The riskiest debt in Europe after Greece remains in Portugal, where current yields are far from alarming levels at 3.02 percent.
If the levels on peripheral sovereign debt start rising materially the euro could take the heat, however as previously stated, we find this scenario to be less plausible.