Jul 7, 2015

All Eyes on Greece: FX Markets in Focus

A decisive 'No' vote in Sunday’s referendum, and a surprise resignation from Greece’s Finance Minister Yanis Varoufakis has the world’s financial markets on edge today. As it looks more and more likely that Greece will exit the euro, in this video blog we have trading strategist and FX expert, Udi Sela to discuss what traders and investors could be expecting in the coming days.

Udi examines FX market impact, how peripheral countries to Greece might react and explains why the markets, especially the banking sector might not be overly concerned with wider contagion at this point. Lastly Udi discusses the Chinese financial markets and what is contributing to its current state of instability.

Jim Jockle (Host): Hi welcome to Numerix Video Blog, your expert source for derivatives trends and topics. I’m your host Jim Jockle. Greece continues to dominate the headlines with the 61% no vote on Sunday’s referendum as it relates to the proposed bailout. More importantly, Euro USD is down as we’re continuing to see shocks throughout the market with pressures within the US stock market as well as in Europe. Joining me today to discuss this is our resident FX trader, Udi Sela. Udi, how are you sir?

Udi Sela (Guest): Excellent, good morning Jim.

Jockle: So, let’s talk about near term concerns. Clearly there’s a lot of unrest going on into the week. What are the things the FX market should be most concerned about?

Sela: Yes, actually we can discuss a couple of market here. So the biggest concerns in terms of FX is of course the euro break. And, of course the fear is, if it starts with Greece what will happen to other currencies and peripheral countries like Portugal, Italy, or Spain. And indeed we’ve seen today when looking at the fixed income market, that there was some pressure on the peripheral bonds such as the big countries, if you like. And, while people were buying a little bit more of US Debt and German Debt and to a certain extent, French Debt. And of course you know the weakness in equity markets and couple that with China we’re seeing a meltdown. So fear now a risk-off, if you like, environment in the market.

Jockle: I caught on linkedin today from Morgan Stanley, and they were suggesting that on the whole contagion might not be such an issue. Noting that, the European economy is in much better fundamental footing. The banks have had time to think about this in terms of potential insolvency and how that will go through other institutions as well as other tools that have been put in place throughout the EU as a quantitative easing, etc. What is your reaction to that?

Sela: Ok, so I tend to agree totally with that and I’ll explain why. So if you look at the first … it was households being over leveraged and what happened was banks assumed the debt and eventually banks were all in debt. And then the third step was basically the government taking the loans from the commercial banks. And indeed this is what we are seeing in Europe where most of the … re-government bonds are being held by the ECB or the governments themselves So therefore, even if there is a complete meltdown, it would not be taken on the banks level, but rather on the government level. And that’s why I think if you look at the reaction today it hasn’t been that bad because everyone had time to prepare. So it’s almost like if you got it today you deserve it, because you didn’t prepare your portfolios properly.

Jockle: What seems to be more on your mind right now is China. So why don’t you give us a little insight to what you’re thinking?

Sela:  If you look at the main Chinese indices over the last 18 months or so, the markets more than doubled and what we’ve seen was a huge leverage, mostly from individuals around China, basically taking credit and buying stocks and at some point the daily jumps were like 2, 3, 4, and 5%. And obviously this had to, just like any market, this bubble had to burst. And indeed they overdid 3 weeks or so, since sometime on the 10th of June or something like that, the air is out of the bubble. And if the Shanghai index was above 5000 points, today I think it’s 3,800, and the Chinese government has announced that first of all no new ipo, and something like 27 investment houses will invest, I think the amount of 120 billion Chinese want to support the market. So obviously there’s a lot of concern given that the GDP in China is not growing at the same pace as the previous years and consumer confidence is low and so forth. This is a big risk for China, hence the governmental support. 

Jockle:  So one last question Udi, just thinking ahead to the next couple of days, obviously it’s still a volatile situation, what’s keeping you up at night, what are you thinking about in terms of what’s on your watch list? 

Sela: Well, these are two separate questions. In terms of what I think is most concerning, will the European … collapse. As we know, you know the biggest problem was always that there was not, with the monetary union, there was no fiscal union. So, does it mean that it was nice, ideal, you can argue about that, about having the United States or Europe will collapse because of Greece. Could it be contained or is it going to touch other countries and then you know it could have severe political impact in terms of extreme nationalists come, parties and so on. So that’s I think the biggest concern. In terms of cards the US sustains, the yields break and so forth.

Jockle: Well Udi, thank you so much for joining us and as this continues to unfold we’re definitely going to want to have you back and get some more of your thoughts. And of course we want to understand all the thoughts that you’re thinking about and what’s keeping you up at night as well, so please follow along on Twitter @nxanalytics or on LinkedIn for the latest posts and information updates from Numerix. I’m your host Jim Jockle.

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