CRASH CONTAINED
World markets keep a lid on chaos.
For all the angst being created by the escalating havoc in Greece and the possibility that it will leave the eurozone, the effect on world markets seemed contained despite a broad selloff on Monday.
Many analysts even seemed to find some joy as Europe’s primary benchmark, the Euro Stoxx 50, fell more than four per cent during the session, while the S&P/TSX composite and S&P 500 indexes dropped about two per cent.
“From a market standpoint, it cannot be stressed enough that the global economy, and especially that of Europe, and the tools available to the ECB, will probably make this angst a short-lived affair,” said David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates Inc. in a note to clients.
“Astute investors with cash on hand will be able to very soon make a re-entry point into risk assets at more attractive valuation levels, especially across the pond.”
Greece’s ongoing troubles took a turn for the worse after bailout talks collapsed last week. Prime Minister Alexis Tsipras on Friday night announced a surprise referendum to be held July 5 that will leave the country’s ongoing negotiations with the eurozone in the hands of its citizens.
In the interim, Greece is expected to miss a 1.6-billioneuro instalment on a loan due to the International Monetary Fund on Tuesday and its banks will remain shuttered in order to prevent a run on deposits.
“Risky assets sold off following the news of the Greece referendum, but the correction has so far been contained,” said Guillermo Felices, an asset allocation strategist at Barclays Capital Markets, in a note to clients.
Most analysts expect further declines over the next few days, but say a full-blown global market meltdown seems unlikely given that there is less chance of contagion compared to when the crisis first flared up in the 2010-2012 period.
“The euro-area in general, and the other peripherals, are in a stronger position,” said Marco Stringa, a Deutsche Bank economist, in a note to clients. “The economy is in a recovery phase, albeit modest, and the current accounts of peripheral countries are in positive territory.”
Stringa said private capital in the other peripherals outside Greece has been stable so far this year and that there has been some progress on the structural reform side, too.
Euro-area crisis-management tools are also much stronger than in the past.
Norman Levine, a managing partner at Portfolio Management Corp. in Toronto, was not surprised by Monday’s sell-off and actually expected stocks in Canada and the U.S. to fall even further than they did.
He also anticipates further declines throughout the week and hopes the long overdue market correction that he and other investors have been waiting for finally plays out.
“We have cash to spend and are convinced that global equity growth will not be hurt in the long-term by the problems in Greece so we are awaiting better valuations in order to invest our cash.”
In the interim, Rosenberg said defensive trades will work best for investors, with the greatest fallout happening among global financials and emerging markets, particularly in Eastern Europe.