Possible Grexit no tragedy for investors
The threat of Greece defaulting is all over the headline news, but investors apparently couldn’t care less.
European stocks actually rose Tuesday even though Greece seems to be on the brink of default. The Stoxx Europe 600 index finished up 0.6 per cent to 385.49. The S&P 500 was also up 0.6 per cent to 2096.3, while the S&P/TSX composite ended the day slightly down at 14,753.1.
“It would seem that traders have been talking about a possible Greek default for so long that it’s just not a surprise anymore,” said Colin Cieszynski, chief market strategist for CMC Markets.
Investors are not completely oblivious to the possibility that Greece may exit the eurozone. A new survey of fund managers by Bank of America Merrill Lynch found that most don’t expect talks with Greece to end well, with 15 per cent predicting a Grexit — Greece leaving the eurozone — and 42 per cent expecting just a default.
The survey found that nearly 25 per cent of the managers have taken out some form of protection or hedge against a potential fall in the stock market in the next three months, the highest percentage since the survey started.
The average cash level among managers is now up to 4.9 per cent, the highest level since January.
“Higher cash levels show how caution is in the air,” said Michael Hartnett, chief investment strategist at BofAML Global Research.
But after five years of being constantly reminded that Greece may default and exit the eurozone, it seems investors no longer fear such an event as they have in the past.
For instance, bond yields in 2012 spiked out of control when it appeared the prospect of a Grexit was imminent, but they were essentially flat Tuesday.
Italian 10-year bond yields were only two basis points higher at 2.34 per cent. Spanish and Portuguese yields, which jumped as much as 16 basis points in morning trading, ended the day where they started.
“While the risk of a Greek default appears to be rising by the day, financial market reaction is restrained,” said Douglas Porter, chief economist at BMO Capital Markets. “Equities have gulped, peripheral spreads have widened, treasury yields have pulled back from last week’s highs — but none of the moves have been anything close to past episodes of the neverending Greek drama.”
Perhaps the most notable sign that investors no longer care if Greece stays or goes is the performance of the euro this year, which, Porter points out, is “the very asset that would be most directly affected by a messy divorce with Greece.”
The currency was moderately down Tuesday against the U.S. dollar, losing 0.39 per cent to close at US$1.1239. But Porter notes the euro has been strengthening in the past few months even as the Greece crisis intensified.
“Not only has the currency not been dropping heavily, it has actually strengthened in the past few months,” he said. “Against the Canadian dollar, for instance, the euro is up more than five per cent from the April lows.”