Flight to quality

Initial market reactions to weekend news on Greece have understandably involved a flight to quality. This morning’s early market reaction has included selling Eurodollars and stock futures on the one hand and buying $US; Japanese yen and gold on the other.

The Greek situation involves considerable uncertainty for investors. The most tangible impact is likely to be reduced confidence especially if, as seems possible, the situation drags on taking time before it becomes clear whether there will be a Grexit and if so how this will be administered.

However, investors have been placing reliance on European systems preventing major banking problems arising from “Grexit”. Assuming this confidence is well placed the confidence impact for investment assets like Australian shares not directly impacted by Greece, could be relatively minor. This creates potential for volatility over the next couple of weeks as markets are alternatively buffeted by the impact of news announcements and bargain hunters wishing to take advantage of a potential value opportunity.

The opening of European markets will be a key focus for traders later this afternoon. Traders may take a cue from the reaction of markets more directly in the firing line including the stock and bond markets of the weaker European nations including Portugal, Spain and Italy. 

The potentially positive weekend announcement of another rate cut by China looks like being swamped, at least initially, by market concerns about Greece in the wider international markets. 

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