The deteriorating situation in Greece wasn’t content with being self-contained: Global markets were hit hard in early trading on Monday, with bourses across Asia and Europe slumping in response.
Last week, Athens called for a referendum — the first since the 1974 vote abolishing the monarchy — on whether to accept a new bailout program from the European establishment.
Over the weekend, the creditors struck back with the European Central Bank freezing its support of Greek banks. Athens responded today by enacting capital controls and shuttering its banks until the vote can be held.
The country is sure to miss its $1.8 billion payment to the International Monetary Fund on Tuesday. And the stakes are high that any policy misstep will result in a political crisis in Greece and a crash out of the eurozone.
In a speech today, German Chancellor Angela Merkel said it was up to Greece to find a way out of this crisis. Yet the Greeks — as indicated in this debt report from the Hellenic Parliament — feel the way out is through the emergency escape. The report came to the conclusion the country shouldn’t pay the “illegal, illegitimate, and odious” debts demanded of it.
Markets are responding as you’d expect. Japan’s Nikkei lost 2.9% as the yen carry trade was hit by safe haven inflows. The Stoxx Europe 600 is down 2.1% as I write this as capital flows into German bunds. E-mini Dow Jones Industrial Average futures are down nearly 200 points.
Gold futures, unsurprisingly, are up $5 an ounce to $1,178.
The interesting development indicative of the scale of the nervousness out there comes from China. The Shanghai Composite fell into bear market territory, now down more than 20% from its high despite a double-dose of policy easing from the People’s Bank of China over the weekend.
If all this wasn’t enough, the Federal Reserve’s potential rate liftoff in September — which would be the first rate hike since 2006 — will demand investor attention on Thursday when the June employment report comes earlier than usual due to the holiday closure of markets on Friday.
New York Fed President William Dudley got the juices flowing Monday morning by saying a September rate hike was “very much in play,” which was a bit surprising given his dovish proclivities.
If the jobs report comes in strong (the consensus is looking for a 5.4% unemployment rate and 230,000 payrolls adds), it would raise the specter of the Fed tightening policy rates from emergency lows first established in 2008 amid an existential crisis in one of the world’s major reserve currencies.
Citigroup analysts expect Greece to tighten capital controls starting July 1 as the situation escalates right through the vote on July 5.
I recently outlined a number of ETFs poised to outperform should Greece default, so be sure to check that out.
For subscribers, the iShares Russell 2000 ETF (IWM) July $125 puts recommended to Edge Pro subscribers on Wednesday were showing a gain of 64% through Friday. Should overnight futures losses hold, Monday’s gain will be a multiple of that initial take.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Two- and four-week free trial offers have been extended to InvestorPlace readers. Clink the links above to sign up.