Greece steps into the abyss

Week Commencing Monday 6th July 2015

Overriding Market Themes

We start this week with the Greek referendum, which given this report is being written on a Sunday, we currently do not know the result. We expect to start seeing firm results relatively quickly given the simplistic nature of the choice, either “yes” or “no”. Casting his vote in central Athens this afternoon, Prime Minister Alexis Tsipras called the referendum a “day of celebration” for the debt-ridden country. Nearby, previous Prime Minister and Conservative leader Antonis Samaras, also cast his ballot stating “We vote yes to Greece. We vote yes to Europe”. This shows the deep divide between the two camps, and with only one winner taking the country in either direction.

Almost 9.9 million Greeks have the right to vote in the referendum. Importantly, amongst these voters are 108,000 Greeks who have just turned 18 and will vote for the first time. This is an important subsect for the government, given that the Greek youth has been very badly hit by unemployment, and are expected to be spearheading the no campaign. Opinion polls have given inconsistent results and none have shown a clear majority for either option. Importantly however, they have all shown an overwhelming majority of Greeks want their country to keep the euro.

The no vote is supported by both the coalition parties in government and the extreme right Golden Dawn party. The centre-right opposition New Democracy party has campaigned for a yes vote as have Pasok and To Potami, both of the centre-left.

Greece will dominate global headlines this week, however more domestically we also have the first true-Conservative budget for two decades due on Wednesday. It is being called an emergency budget, as it is being introduced so soon after the general election. Given what we know, it should concentrate in a number of key areas. Firstly there will be a new austerity drive, most probably deeper and harder than ever before. According to a source within PwC, the cuts in 2016-17 and 2017-18 will be twice as deep as any annual cut in the last Parliament, with further cuts in 2018-19 of a similar magnitude to those implemented by the coalition.

We should also see some interesting changes to both business and personal taxes, as well as the headline grabbing new inheritance tax policy, taking the threshold up to GBP 1 million. Devolution should also play a key part, with Scotland likely to gain full control over income tax rates and bands, while the first 10 percent of VAT receipts will be held within the country.

Given Greece, this will likely play second fiddle in most currency traders’ minds, however it will have a profound impact on Sterling’s direction should we see announcements out of the norm. All things being equal, we have an interesting week ahead!

GBP This Week

We continue to think GBP out performance versus the EUR will persist for the coming week, despite the institutional risks and the perceived impact from fiscal tightening weighing down UK economic growth forecasts. The however, will likely result in a more accommodative monetary policy stance from the Bank of England, and may well reverse some of the decent gains we have seen on GBP/USD over the past month.

USD This Week

We expect the USD to remain generally well supported next week despite the somewhat disappointing June employment report in the US and a lack of relevant economic releases. This is mainly in part to continues capital flight from Europe to the US (and other safe haven currencies) on the back of the Greek question, and relatively strong fundamentals versus its peers.

EUR This Week

Greek developments are likely to overwhelm data this week as noted in the detail above. A “no” vote, and the likely associated exit from the single currency, is totally negative for the EUR in the near term, or at least until FX markets reassess the stability/viability of the currency union. The EUR is likely to rally on a “yes” outcome, however we expect this to be short-lived as both parties return to the negotiating table.


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