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The headwind that hasn’t yet rattled the markets

27 May 2015

JP Morgan’s Kerry Craig tells FE Trustnet why the EU referendum isn’t the only factor that could spook the markets and why we can’t rule out the potential for a ‘Grexit’ yet.

By Lauren Mason,

Reporter, FE Trustnet

Despite markets brushing off a potential ‘Grexit’, nobody should be undermining the severity of the problems that the Greek economy faces and how this will impact economies globally, according to JP Morgan’s Kerry Craig.

The global multi-asset market strategist says the Greek crisis is Europe’s biggest headwind and as such should not be discounted by investors.

Craig’s concerns are supported by a Bank of America Merrill Lynch (BofA ML) report released last week, which points out that time and cash is running out for Greece. It argues that alternative solutions need to be found as soon as possible to lower the risk of a Grexit, which it believes to be very real.

Craig (pictured) believes that the severity of the macroeconomic situation still isn’t being factored into the market in the way he would expect.

“Across the channel the headwind is Greece to my mind,” Craig said. “Again, it’s getting a lot of press but has largely been put to one side by the markets – you’re not seeing any contagion in equity markets or fixed income markets.”

“With Greece, they very much are going to run out of money in a couple of weeks and they’ll only be able to make those payments to the IMF [International Monetary Fund] and the ECB [European Central Bank], and even to their own workers and pensioners, if they do get some sort of disbursement of that final bailout package given to them in the next couple of weeks.”

“The market really is discounting any chance that Greece is going to leave – you’re not seeing it in any of the equity or fixed income markets to the extent that it should be and that’s because everyone really does believe that they won’t leave.”

While Craig doesn’t believe that Greece will end up being “kicked out” of the eurozone, he doesn’t believe in ruling out the possibility.

What’s more, he says that if Greece does leave, the ramifications are unknown as it has never happened before, meaning the Grexit situation should be watched closely despite the market’s complacently.

While the market arguably hasn’t been reflecting the severity of the situation, the dire financial situation in Greece has been dominating the news over the last few days as the country’s next payment deadline edges closer.

Angus Campbell, senior analyst at FxPro, points out that markets have finally started to become wary, following a sell-off in the euro yesterday and the fact that Greek stocks fell over 3 per cent on Monday.

Over a period of 24 hours, the euro dropped 0.85 percentage points to deliver negative returns of 1.31 per cent compared to the pound, according to data from FE Analytics.


Performance of currencies over 1month

Source: FE Analytics

“The news flow over the extended weekend has unsurprisingly been focusing on Greece as the end of another month nears and substantial payment deadlines loom,” he said.

 “Not only will they have their monthly pension and civil servant pay packages to settle, but the next large slug back to the IMF is due on 5 June, a sum of around €300m and only a fraction of the total €1.6bn to be repaid next month.”

 “After an impressive recovery by EUR/USD all the way back above the 1.1400 level, the euro has been crashing back down to earth and is now trading back below 1.0900 at 1.0895 [yesterday] morning.”

 “Investors see the mountain that Greece has to climb over the summer and are starting to become nervous as was shown not only by the sell-off in the euro, but in the fall of Greek stocks.”

 The BofA ML report, entitled Greece: Thinking Outside the Box, states that the risk of a Grexit is all too real,and proposes an alternative measure consisting of four steps.

These steps, it says, will force Greece to take full responsibility for its actions and would be less detrimental than ousting the country from the eurozone.

The first measure the report proposes is to use the European Stability Mechanism (ESM) – the eurozone’s permanent rescue fund – to repay the Greek bonds that the ECB holds. The report then suggests the re-profiling of the official European loans to the Greek government, consistent with fiscal targets.


The following step would be to leave Greece to its own devices to achieve these fiscal goals and repay its loans without a programme devised by the ESM and the IMF. The ECB would then continue to support Greek banks as long as the Greek government continues to repay its loans.

“We argue that the eurozone authorities could consider what we are discussing as an alternative to Grexit, among other possible options,” the report says.

 “The potential benefits include making Greece fully responsible for Grexit, forcing the government to own the reform agenda and increasing the expected recovery value of the loans of the rest of Europe to Greece compared with a Grexit scenario.”

 “This is not ‘free money’ for Greece, as Greece will not receive any new money— money will simply be transferred from one pocket of the eurozone to another.”

 “The appropriate fiscal targets could provide the Greek government with incentives to reform in order to stay in the euro and eventually improve its sovereign rating and gain market access. Greece can still ask for help to implement reforms in the form of technical assistance.”

 As Greece continues its negotiations in Brussels today with its creditors, Craig believes that investing in Europe is still an attractive prospect.

 “Thinking about positioning and investing around the world, we do still like the eurozone because of the growth potential there,” he explained.

“Compared to the UK it has much more upside so we would prefer that, if we had to invest in Europe, we would invest in continental Europe rather than the UK.”

“We very much do like the UK economic story and the way it’s progressing – but we do think the equity market has had a lot of its good news factored in already whereas the eurozone still has much more to go.”

“We don’t feel unfavourable towards the UK, we just feel that continental Europe has a bit more upside in terms of opportunity.”

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