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Update on Greece bailout & other market factors

greece bailoutCourtesy: Alpha Funds Management and Dr. Ron Brewley
July 7th Update

Many of us were expecting far more volatility on world stock markets than what actually happened. Most European markets were down between around  1.5% to  2.5% with the London FTSE down only  0.7% and the S&P500 down only  0.4%.

Iron ore and oil prices were down sharply overnight but not because of Greece. There are many factors at work in those sectors including China's response at the weekend to help moderate its stock market sell-off.
In a surprise move, Yanis Varoufakis, the Greek Finance Minister resigned overnight. He had threatened to resign if the No vote won. That he went on a Yes vote is a measure of how disliked he was by senior European negotiators, and he has now been replaced by another British trained academic!

It is now up to Greece to come up with a new deal proposal, and until then it looks like banks will stay closed, and cash will be drying up. A parallel currency – or a series of IOUs – seems needed to keep imports of essential goods going. And while a heavily depreciated 'drachma' might have some positive impact, pensions are such a large part of GDP that any impact on growth will be limited.

Perhaps the biggest problem is this. After the big build up to the referendum and the Sunday night street parties, Greeks will realise their lives aren't suddenly going to improve at all – let alone start a return to the pre-GFC days. The possible social reaction could damage tourism at the height of the season making Greece worse off.

The ECB and IMF will continue the limited assistance, but more will be needed. Nonetheless it is clear markets across the world seem confident there will be no spill-over from whatever happens in Greece. Indeed, our ASX 200 futures are pointing to a positive start today indicating investors think we over-reacted on Friday and Monday. However, the futures market has not been a good predictor in recent times.

Ron Bewley PhD, FASSA
Director
Woodhall Investment Research

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