Greek no vote and falling commodities point to a nervous day

Faced with a combination of the Greek no vote, weakening commodity prices and nervousness about the possible spill over effects of plummeting Chinese markets, investors will be thinking safety first this morning.

Faced with a combination of the Greek no vote, weakening commodity prices and nervousness about the possible spill over effects of plummeting Chinese markets, investors will be thinking safety first this morning.

While local markets look set to open lower this morning, the real test for world markets will be tonight’s reaction on European equity and bond markets. These are the markets directly in the firing line from any problems that do emerge in Europe. In particular, European bonds will reflect any growing concerns about the ECB and its long term capacity withstand the impact of debt defaults by Greece.

The conclusive no vote by Greece seems likely to lead either to a watering down of the troika’s conditions for extending further credit to Greece or to a full blown “Grexit”. From a market point of view both alternatives carry risks. The former will increase potential for similar demands from other European nations, while the latter will create a period of uncertainty and possible doubts about the long term viability of the Euro.

The local market will not be helped by Friday night’s large drop in oil prices or further weakness in the spot iron ore price. Oil has broken out of the holding pattern that was in place from much of May and June as traders waited on an expected cut in US shale oil production. The possibility of a significant increase in supply if sanctions against Iran are lifted, together with a strengthening $US have seen oil prices capitulate with potentially negative implications for energy stocks today.

Weaker prices today will dispel near term hopes of the ASX 200 index breaking clear to the upside of its 200 day moving average around 5585. Last week’s low at 5390 now represents initial support while a break below that could see a test of the 78.6% Fibonacci retracement of the October/March rally. This retracement level cuts in at 5309.

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