It’s happened: The Greek people voted on Sunday against the last major bailout package the European establishment had offered it, throwing its future within the euro in jeopardy. It was a big victory for Prime Minster Alexis Tsipras, the leftist firebrand that lead the SYRIZA party to victory at the beginning of the year.
And although futures sold off initially in the overnight session, word that Greek Finance Minister Varoufakis had resigned on Tsipras’ request boosted sentiment and has contained the stock market fallout in trading on Monday.
Still, the major averages finished in the red. In the end, the Dow Jones Industrial Average lost 0.3%, the S&P 500 lost 0.4%, the Nasdaq Composite lost 0.3% and the Russell 2000 lost 0.1%.
Crude oil took the brunt of the damage on concerns over rising production, rising inventories and a looming demand slowdown (both the end of the U.S. summer driving season and any eurozone fallout from the situation in Greece). Iran’s plan to aggressively expand exports should a nuclear deal lift sanctions was also cited.
West Texas Intermediate lost 7.4% to close at $52.74 a barrel — the worst one-day loss since December as it black stuff nears its 16-year support line. That was great news for the ProShares Ultra Short Crude Oil (SCO) position recommended to Edge subscribers, which gains nearly 13% to bring its month-to-date gain to more than 23%.
As you can imagine, energy stocks took the brunt of the selling pressure as a result falling 1.3% as a group. Halliburton (HAL) lost 2.9% to bring the Jul $43 puts recommended to Edge Pro subscribers to a gain of nearly 190%.
As a reminder that the Q2 earnings season starts on Wednesday when Alcoa (AA) reports, AMD (AMD) cut its revenue guidance to a fall of 8% versus prior guidance of a decline of 0% to 6%. The company blamed weaker-than-expected consumer PC demand. Shares are down 13% in after-hours trading.
Expect the disappointments to continue: According to FactSet, year-over-year earnings for the S&P 500 are projected to decline by 4.5% — the first outright decrease in earnings since 2012 and the largest decline since the third quarter of 2009. The drag from the stronger dollar and weak energy prices are to be blamed again.
Back to Greece: what happens next largely depends on the action of the European Central Bank and whether it increases, holds steady, or cuts its liquidity support of the Greek banking system. You’ll remember that Greece’s banks have been closed all week after today’s referendum was announced last weekend and the ECB froze its level of support.
Today, the ECB increased the haircut on collateral it accepts from Greek banks, moving them closer to insolvency.
Reuters is reporting that these banks will stay closed at least until Friday at a time when grocery shelves are growing bare and businesses are on the verge of shutting down as supply chains are disrupted. Greek depositors holding large balances — unable to transfer money out of the country or withdraw more than $66 from ATMs per day — are at risk of a “bail in” of at least 30% on deposits greater than $8,800, according to the Financial Times.
A Greek exit from the currency union is a rising possibility.
Analysts at JPMorgan see a “Grexit’ and eurogroup split in the coming days, with a Greece departure from the euro their “base case” after the vote.
The ultimate fate of what happens comes down to a race between two forces. In their words, it’s “political pressure to move toward an agreement despite resistance from a number of northern European parliaments, versus the increasingly unpleasant implications of a dysfunctional banking system on the other.”
If a stalemate persists, the next big deadline will be a $3.8 billion payment to the ECB on July 20. A default on this by Greece would likely force the central bank to pull back its liquidity support, force Greece to issue California-style IOUs as reported by the Telegraph, and precipitate the move towards the restoration of the drachma.
Unless Europe countenances to Greek debt relief soon, the situation will quickly deteriorate — pulling U.S. stocks down in a way we haven’t seen in years.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
