With the dovish announcements of the US Federal Open Market Committee (FOMC) behind us, the markets will now exclusively focus on the developments in the Eurozone with respect to Greece. We are only 10 days away from the June 30 deadline by which Greece has to pay back the IMF more than $1 billion. Without a new bailout package, that would be impossible and the Greeks stand on the verge of a default.
Surprisingly, the market has not priced in the likely hood of a Grexit with the euro holding up above 1.13 against the dollar and European bond yields have not been bid strongly either. Perhaps there is a strong belief among market participants that we may see a positive news flow after the talks start with an emergency summit on Monday (June 18) evening. Both Tsipras and Merkel will be in attendance so the decision makers are in place but whether either side concedes remains an open question. If an agreement is not made at the time, the next key event risk is the special summit planned for June 25-26. These two meetings are the last official opportunities for a deal to be reached but if it becomes necessary, the market remains confident that emergency meetings will be held on a daily basis into the weekend and the June 30 deadline.
This column’s base case scenario is that the Greeks get some kind of a deal in which Chancellor Angela Merkel and her German colleagues can walk away with some sense of respect! After all, it would be a shame for the Euro economy to be hit by the economic shock of a Grexit after the European Central Bank’s quantitative easing measures have bought back a sustained uptick in economic activity. We have seen positive and encouraging readings on the CPI front, better than expected data releases in PMI activity, retail sales and manufacturing output.
However, if there is a last minute fallout in the discussions, the key point to note is that a Grexit is a long-term positive for the Eurozone. There will be market ripples felt across the board and in various asset classes in the short-term but the investment opportunities lie in buying the dips if there is indeed a deep sell-off.
Below are the some tactical trades which can give handsome returns on a 6-12 month basis.
Go long USD/CHF
The Swiss franc will be the biggest beneficiary from a Grexit. Like the yen and the dollar, it will be bid up as the safe haven currency within the Euro area. It is already trading at multi-month highs against the greenback but the monetary policy divergence theme and the relatively stronger performance of the US economy versus the Swiss economy will drive this currency pair going forward. When the dollar strength returns in anticipation of the first rate hike, one can expect the Swiss franc to head towards parity against the greenback. This implies an upside in the USD/CHF pair of more than 800 pips.
Short gold post Grexit
Gold has staged an extremely weak rally even after the dovish comments from US Fed chief Janet Yellen, fears of the China bubble bursting and systemic risks to the euro following a Grexit. Clearly, gold is in a bear market and one should overlook these small relief rallies. The strong hands are still net short the yellow metal with price targets of below $1,000/oz. Investment demand in China and India remains robust, central banks are net buyers, jewellery demand in places like Japan is picking up and still gold refuses to break the key resistance of $1,250/oz. However, in the aftermath of a very unlikely Grexit, it could be the case that we see gold breaking $1,325/oz. One should use such a bounce to sell gold with an eventual target of below $1,000/oz with a time horizon of one year.
Indian equity markets: Compelling buy below Nifty 8,000
After consolidating between the 7,900-8,000 level, Indian markets seemed to have made a bottom. But if there is a global equity sell-off post the Greece fallout, India will not be decoupled. However, the sell-off would be contained to recent lows and a strong technical double bottom is likely. The best place to be in good quality financials even though RBI Governor Raghuram Rajan has bitterly disappointed the markets by being a hawk in a global economy with ultra low global yields. Global energy prices are being held up by the seasonality factor and post summer, one can expect them to correct by 10 to 15 percent. It is only a matter of time before the RBI realises that India’s economy urgently needs a significant reduction in the cost of capital.