EURO VOTE MAY FUEL WILD RIDE
Stocks could tumble while bond prices rise, analysts say
“I think the equity market sells off” Monday. Many analysts expected a closer contest and a victory by bailout supporters, so “the vote was worse than people expected.”
Daniel Morris, global investment strategist for financial services firm TIAA-CREF
Financial markets are braced for more turbulence this week after Greek voters on Sunday resoundingly rejected the bailout terms demanded by Athens’ creditors, increasing the likelihood that the debt-wracked country will exit the euro.
“I think the equity market sells off ” Monday, said Daniel Morris, global investment strategist for financial services firm TIAA-CREF.
Sunday night, futures markets pointed to a slide on Wall Street Monday of close to 1.5% in the Standard & Poor’s 500 index. On Monday, Japan’s Nikkei opened down more than 300 points.
Many analysts expected a closer contest and a victory by bailout supporters, he said, so “the vote was worse than people expected.” That, Morris said, likely means Greece’s left-wing government will be emboldened and less willing to accept any harsh conditions put forth by its creditors — the International Monetary Fund, the European Central Bank and the European Commission.
Last Monday, after Greek Prime Minister Alexis Tsipras announced the referendum, European stock markets fell about 4% and the S&P 500 in the U.S. dropped 2%. David Joy, chief market strategist for Ameriprise Financial, said declines on Monday could be bigger as fear and uncertainty grip markets, driving investments to safe assets such as U.S. Treasuries.
That would push up bond prices, and drive down yields, not just in the U.S. but also in financially sound eurozone countries such as Germany. Morris estimates yields on U.S. Treasuries could fall as much as 15 basis points. Meanwhile, bond yields in struggling eurozone countries such as Italy, Spain and Portugal will likely rise.
The prospect of a Greek exit from the euro ignites fears that those cash-strapped eurozone countries could follow. Analysts said that’s likely to further hobble the euro Monday and strengthen the dollar, potentially crimping the exports and earnings of U.S. multinationals that draw a big share of their revenue from the eurozone. Futures trading had the euro off 1% vs. the dollar Sunday night.
In the short term, the ECB should continue to provide emergency funding to Greek banks but it will probably not increase the cap, economist Iscaro Diego of IHS Global Insight predicts. That, he said, raises the odds that Greek banks will run out of cash within days and not reopen as scheduled July 7.
Yet all three analysts expect Greece and its creditors to resume talks as Athens seeks fresh bailout money. Morris said he believes a deal eventually will be reached that allows Greece to get some debt relief and stay in the euro. As a result, the expected drop in stocks “is essentially a buying opportunity,” he said.
Joy said he doesn’t think stocks will bounce back quickly, noting that talks could drag on for weeks or months. Still, he said he doesn’t believe the effect of the impasse will be enough to keep the Federal Reserve from raising interest rates from near zero levels in September.