Whatz ahead post Greece referendum? Not a make-or-break event!

ECB choice between near term pain and long term agony

Despite Greece contribution to the top-line balance sheet of Euro zone or Global economy is miniscule, too much of hash tag significance has been given to #Grexit and #Greferendum in the social media by economic & financial markets analysts. And, markets have been in back-and-forth mode driven by news flows either in favour or against. First, the focus was on the 30th June IMF loan repayment default and now on the outcome of the referendum.

Come what may, global (and emerging) markets have nothing much to gain or lose! The gain or pain will stay within Greece and the Euro zone. Greece has more to lose or gain than the Euro zone, and the Greece Government is short of cash to get out of this crisis. Greece is now like a NPA borrower, seeking restructuring of existing debt with hair-cut (on amount & interest rate) and long gestation period to start the repayment process. Greece voters would be aware of this hard reality, post the recent curbs on its financial system. While a "YES" vote will be immediate relief to keep the negotiations alive, a "NO" vote will be disastrous, and major setback to creditors putting them on back-foot.

It would need the Euro zone heavyweights (Germany and France) to do lot of financial sacrifice to avoid #Grexit now or later. While the setback (from "NO" vote preparing for #Grexit) will be near term driven by sentiment, the relief may be long term to shift focus away from Greece towards stabilizing the growth offshoot. There will be near term weakness, but investors will see this as value-buy long term opportunities. There has been decent correction in the Euro zone equity markets with minor push-back in the US. It is possible that downside risks from here is limited. The interest rate market has been steady around mid-point of recent low and high, and it is possible that overshoot either way beyond here may not sustain. The currency market has also been steady; DXY marginally up from 93.50 to 96.50, driving the Euro down from 1.1450 to 1.0950 before stability around 1.11. The impact on the commodity market is not very significant; Brent at ease from below $70 to $60 and Gold didn't benefit from the risk-off stance with gradual decline from above $1200 to $1160. A "YES" vote will lead to dilution of nervous undertone while improving investor sentiment (if not the confidence), but this does not imply that the markets will get into run-away bullish momentum. In the absence of clarity on "What Next?" and the final outcome, upside gains will stay limited. All taken, there will be knee-jerk reaction, up or down before stability, retaining neutral (to mildly bearish) undertone on the way forward.

Global markets shift focus away from Greece to macro fundamentals

DJIA trading focus for 2015 has been at 17000/17150-18350/18500, and now around mid-point. The set zoom-in focus at 17500/17650-18000/18150 has held well against #Grexit volatility. Now, risk from early front-loaded rate hike by FED during September - December 2015 is seen to be diluted with shift to later part of Q4/2015. This is immediate relief to keep investors in risk-on mode riding the liquidity and low interest rate regime for some more time. All combined, stretch weakness if any below 17500 ahead of strategic support at 17000-17150 is good risk-reward buy opportunity for revisit to 18350-18500.

10Y US Treasury yield is around mid-point of set 2.20-2.60% focus. It is bias neutral for near term stability either at 2.20-2.35% or build rate-hike fear for consolidation at 2.35-2.60% till better clarity on the timing. The strategy is to stay in focus at end-to-end of 2.20/2.30-2.50/2.60%.

DXY in volatile mode in 2015; in bullish mode from above 90 to over 100 before consolidation at 93/93.50-97.50/98.00. Now, need to be prepared for Euro driven volatility; into 98-100.50 on Euro weakness into 1.05-1.0650 and into/below 93.00 on Euro recovery into 1.1350-1.15. The strategy is to stay fleet-footed at 1.05/1.0650-1.1350/1.15 against caution from Central Bank's support at/below 1.08-1.0950.

JPY derives safe-haven support (as alternate to USD) against downside risks on the Euro, with USD/JPY unwind from below 126 to 122. While recent high of 125.85 seen to be intact, downside risks on USD/JPY below 121.85-122.35 comes into focus for deeper correction into 120-121 before stability. The strategy is to stay focused at end-to-end of 120/121-125/126.

India markets shift undertone from bearish to neutral

India financial markets have unwound recent weakness, staying resilient to #Grexit and Euro zone woes. NIFTY posted swift recovery from 7950 to 8500, so is Bank Nifty 17200 to 18750. 10Y bond yield remained volatile at 7.67/7.70-7.90/7.93 with back-and-forth moves before settle around 7.80%. Rupee unwound recent weakness from 63.45 to 64.30 and now at 63.35-63.50. The supportive tailwinds are from better than expected monsoon and positive external factors from recovery in Brent Crude from $70 to $60, US economic data not in favour of front-loaded FED rate hike and crash in Chinese markets. All combined, the dilution of risk from FII early exit and possibility of RBI rate cut in H2/FY16 have emerged as positive cues for Indian financial markets.

No clarity (and confidence) as yet to turn bullish, hence into consolidation phase

Should NIFTY focus retained at 7950/8000-8450/8500 (Bank NIFTY at 17100/17250-18700/18850)? A "YES" vote on #Greferendum will lead to extension into 8635-8685 (19100-19250) before stability, while "NO" will lead to direct unwind of recent recovery for 8185-8235 (17800-17950) seen as strong near term support zone. Combination of both sets up trading focus at 8150/8200-8500/8650 (17850/18000-18750/19100) with caution against overshoot either way, which is not expected to sustain given the mixed outlook both on domestic and global cues.

10Y bond at mid-point of short term strategic focus set at 7.67/7.70-7.90/7.93%. It is neutral bias here, but appetite will be low at 7.67/7.70-7.80% and huge value-buy interest at 7.90/7.93-8.0%, seen as extremes for rest of 2015/FY16. So, need to be fleet-footed to trade the 7.70-7.80% play. The other option is for yield spike into higher end of 7.80-7.90%, which is tough to hold with RBI in stand-by support. Both combined, set focus at 7.72/7.75-7.87/7.90% and overshoot either way not to sustain.

Rupee firm at lower end of set strategic focus at 63/63.35-64.65/65.00, while RBI prevented weakness into 64.65-65.00 with good $ supplies at 64.20-64.30 and 63.90-64.00, it is also expected to have large appetite at 63.35-63.45 and 63.10-63.20. Now, let us stay focused at 63/63.35-63.95/64.30 with most trades at inner-ring. It is prudent to stay risk-neutral at either end with near term import hedge and short/medium term export cover.

Have a great and safe week ahead!

Moses Harding