Disorderly markets vindicate Greece's importance in the world

Outlook:

It’s conceivable that the Greek leadership was hoping for exactly the effect they got yesterday—equities tanking, safe-haven yields falling but periphery yields rising, and general volatility. From the Syriza point of view, disorderly markets vindicate Greece’s importance in the world, despite GDP being only a tiny share of the eurozone total (less than 3%). China’s intervention would be seen as a nuisance, since nobody could untangle what degree of global instability can be attributed to China and what to the Greek crisis.

We are not much of a fan of VIX, the CBOE volatility index, but it is used as a proxy for risk sentiment. The VIX closed Monday at 18.85, on the high side of the day's range of 15.82 to 19.50—we need to watch it closely today. Market News reports that up to yesterday, during June VIX ranged from 11.93 to 15.74, so the closing reading at 18.85 is a breakout. The Monday reading is the highest since Feb. 2, but any number under 20 is still “risk-friendly.” So far this year, “the VIX traded and closed at 20+ levels a few times in early January and traded above 20 once, on Feb 2.”

It’s important not to attribute meaningful distress to markets after only one day. We do not know if we have a “Lehman moment” or a “Sarajevo moment”—yet. And we do not have information on intervention. The Swiss National Bank admitted intervening, presumably in euro/CHF (where you can see a spike on the hourly chart at 3 am ET), but what was the ECB doing, or encouraging others to do? What was the BoE, BoJ or Fed doing? We are not getting any chatter about intervention, but that doesn’t mean there wasn’t some serious arm-twisting taking place.

Besides, the situation is so awful and dire that it’s nearly not believable. And maybe we shouldn’t believe it, entertaining as it is to survey the stories as they come flooding out. The top Greek negotiator and chief economic advisor, Mr. Tsakalotos (who rejoices in the first name of Euclid), told the press "We look forward to greater flexibility in the days to come.” The referendum is part of the negotiating pro-cess, not a substitute for talks. Tsakalotos offered up a summary of the last months and points out that the Greek economy would not have recovered under the proposals. This is the view of an Oxford economist and seemingly couched in more civil terms. Bottom line—Tspiras and the firebrand Vaoufakis are not the only voices we should heed. Or maybe it’s Tsakalotos who is delusional.

A final idea on why the euro is hanging on to unexpected gains—it really is the 11th hour and in the end, both parties will recapitulate, as Larry Summers suggests. He accuses both sides of behaving irrationally and the only one to come out of the mess with his clothes not in disarray is Draghi. Even German FinMin Schaeuble said, in a closed door meeting, that Greece can stay in the eurozone after default. Several analysts have pointed out that the FX market is so volatile now it doesn’t pay to take a positon, not matter how fast your fingers. We concur. We are issuing buy/sell signals in the afternoon trading advisories, but realistically, they are best-effort but not worth very much. And liquidity must be drop-ping like a rock. Friday is a holiday in the US after payrolls on Thursday, possibly driving Greece off the stage, at least for some minutes. Get out of Dodge.