Greece Referendum: Bank Closure To Focus Minds

The weekend’s dramatic events in Greece have increased the probability of ‘Grexit’ from 5-10% to between 30-40%. Investors should be prepared for a risk-off environment as a market riot produced by a referendum or even an early election in Greece may be necessary to get both sides to a ‘Yes.’

BCA’s geopolitical strategists will publish a report later today on the situation in Greece and what it means for investors. The Special Report will be sent to all BCA clients.

The Report addresses 10 key questions including:

  • Can Greece cause a meaningful correction in global equity markets?
  • What is the timeline of key events?
  • Can ‘Grexit’ produce substantive contagion beyond sentiment?
  • What should investors do?

Handicapping the referendum is extremely difficult. Two recent polls suggest that a robust majority (50-60%) of Greek citizens supported the June 22 proposal submitted by Tsipras to European creditors. The subsequent rejection and revision of that proposal by the IMF and Eurogroup increases the likelihood of a ‘No’ vote. However, the inability of Greek voters to access their bank deposits will likely focus minds and encourage them to vote ‘Yes’.

Negotiations will continue until the Greek central bank is instructed by the government to physically print new currency. Credit controls, default, even the issuing of IOUs are all simply steps that take Greece closer to a crisis, but are not by themselves critical. A clean break from the euro is not imminent even if the vote is ‘No’.

In the near term, we expect that ‘risk off’ will dominate market trading. Sources of uncertainty are rising, especially in the context of a looming Fed rate hike and elevated equity market valuations.

In the medium and long term, Greece’s exit from the euro area would have a minimal impact beyond the immediate turbulence and shock to European business confidence. BCA’s Geopolitical Strategy and Global Fixed Income Strategy services have recommended underweight positions in peripheral bonds versus the core market, but we will view any significant spread widening as a buying opportunity.

Please see today’s Special Report for all the details.

Oil: Supply-Demand Imbalance

The rate of growth in demand for petroleum products is sputtering outside the U.S.

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In Emerging Markets (EM) economies, demand growth, which we proxy using non-OECD liquid fuels consumption, was up a little over 2% year-on-year (yoy) in May. However, when China’s 3.2% p.a. growth is stripped out, EM demand growth falls to just 1.7% yoy. In addition, the rate of change in annual EM growth is negative, meaning growth is slowing.

Demand for petroleum products in Developed Markets (DM), which we proxy using OECD fuels consumption, is up a little over 1% yoy. When U.S. performance is stripped out, DM demand actually contracted almost 1% yoy in May, leaving world demand growth at 1.1% yoy. By comparison, world production is up more than 3% yoy, and stands at about 96 million bbl/day (mm b/d).

This supply-demand imbalance will continue to keep inventories high globally, as can be seen in the implied stock change and balances forecast by the U.S. EIA. If anything, the EIA’s expectations understate the potential physical imbalance next year, if Iran’s production can ramp at anything close to what officials there claim – i.e., up to 1 mm b/d of additional production, once sanctions are removed.

Market expectations for the incremental supply coming on out of Iran range between 500 thousand to 800 thousand bbl/day (kb/d) beginning later this year, following the successful conclusion of negotiations between Iran and the P5+1 states over Iran’s nuclear program. This, too, may understate the incremental supply forthcoming following the conclusion of the negotiations, given Iran’s floating storage is estimated at up to 40 million barrels. The floating storage can be brought to market immediately, provided buyers can be lined up.

On the demand side, weaker EM growth will weigh on oil demand globally. Please see the next Insight, (Part II) Oil: Supply-Demand Imbalance.