It is short term negative but look to buy the Index in market falls
The surprise call for a referendum on accepting EU (European Union) terms for a Greek bailout has sent the markets in a tizzy. Equities fell by over 2.5% across the globe while the Euro fell by close to 3% against the USD. Bond yields in the US and Germany fell by over 10bps on flight to safety by investors. Indian markets too reacted negatively with Sensex and Nifty falling by over 1.5% while the Indian Rupee lost close to a percent against the USD.
The Greek referendum threatens to negate the EU agreement on the bailout of Greece and other indebted EU countries. The doomsayers are predicting a collapse of the Euro if Greek voters vote against the bailout plan and vote to get out of the Euro. Greece will default on its bonds leaving bondholders to write down Greece’s debt by 100% instead of by 50% as suggested by the EU. There will be issues on the exit of Greece out of the Euro in terms of the logistics. In short things can get messy in Europe if Greeks vote against the bailout plan.
The events are still unfolding and the Greek PM is meeting EU leaders on the 2nd of November to explain the call for a referendum. The Greek PM will also have to survive a no confidence vote as many members of his party are against the call for a referendum. Until there is clarity on whether the referendum will take place or not, markets will swing between gains and losses. In the event of a referendum not happening, markets will see huge gains and if referendum does happen markets will see falls and remain depressed until the vote results are out.
In the meanwhile there are other events that could be positive for markets. The US Federal Reserve is meeting this week on policy and if they announce more stimulus measures, it will boost markets. The European central Bank is also meeting this week and any rate cuts by the bank will be positive for markets. The G20 nations are meeting this week and positive sound bytes of China, Brazil, Russia and India agreeing to finance the EFSF (European Financial Stability Facility) will help markets.
Greece referendum is a threat to markets in the short term but it could also swing both ways. Given that the markets have rallied by over 8% in October 2011, profit taking at higher levels is bound to happen. Greek referendum is proving to be an excuse for profit taking. It is unlikely that markets will test new lows given that the agreement on by EU nations on bailout has been reached. The prospects of the RBI maintain policy rates status quo in the forthcoming policy reviews are also positive for markets.
Investors should look to buy into the Nifty Index if markets fall.