Market commentary: As Greece teeters, where are the markets heading?

Greece continues to make headlines through what seems an endless string of developments that is keeping markets wired to the business news channels in an attempt to mitigate and fast reacting to any sign of worsening of an already extremely precarious Greek situation. 

After the announcement of an unexpected Referendum last Saturday by Greek Prime Minister, negotiations have completely broken down over the weekend, with EU member states declaring that the Greek referendum would be equivalent to a vote on the country’s Euro membership.

The Greek government has since then taken unprecedented emergency measures, such as the closure of the country’s banks and imposition of capital controls, while reiterating its defiance towards its creditors by issuing increasingly harsh statements criticizing the three international institutions involved in the failed bailout negotiations.

Markets, as expected, did react to the worsening of the Greek crisis and its potential negative ramifications by pressing the “SELL” button on Monday, with stocks and bonds declining across the board worldwide. The Shanghai Composite Index lost about 5.5% during the first trading session of the week entering in bear territory, while Japan declined around 2.5% between Friday and Monday, and the Australian market shed 2%.

In Europe, stocks plunged, with the Dax Index losing 4%, the FTSE 100 down 3%, and the Euro Stoxx 600 Index dropping as much as 3%. US stocks did not do better, with the S&P 500 erasing most of the gains posted this year by declining about 2.33% between Friday and Monday, and the Nasdaq booking a 3% loss.

Notwithstanding the widespread propensity to sell, the markets somewhat stabilized on Tuesday with the US equity indexes posting timid daily gains and European markets limiting losses. Although a negative reaction from the markets is understandable and was largely anticipated, I believe that, considering the potential negative consequences related to a messy Greek default, markets did not perform all that bad. Surely there was a pull back, however I see a 2% to 3% decline far from being the beginning of a panic sellout feared by all market participants.

On Tuesday evening Greece missed its payment to the IMF, as it said it would, and despite the word “default” has been carefully avoid by IMF’s officials, a formal statement was released acknowledging that Greece did not honor its debt obligations. With the Mediterranean country in technical default and the lack of any sort of new financing deal on the table, investors are most likely asking: “how much can the Greek crisis really affect markets and valuations?”

In my personal view, I do expect an increase in volatility and probably some additional pull backs in the coming weeks, however I think that a small correction and a broad valuations’ reassessment may actually prove healthy and could provide interesting buying opportunities.

Although suggesting caution as markets have become a “pick the right investment” environment, is Greece really going to substantially affect macroeconomic fundamentals, calling for a complete revision of market expectations and assets’ valuations? In my opinion it is not, and therefore I believe that any correction may indeed offer advantageous entry points for investors willing to buy solid companies that would be trading at a discount from their 52-week highs, while still maintaining their fundamentals intact.

In conclusion, it seems that the whole Greek default situation is having a smaller impact the analysts had predicted, and although event-driven volatility is expected to dominate the trading floors over the next few weeks, I think positive earnings releases could downplay the negative effects of Greece, offering interesting opportunities for medium to long term view investors.

This article was issued by Paolo Zonno, Trader / Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.