Markets Volatile As Greece Imposes Capital Controls; China Cuts Key Rate

The euro plummeted 2% against the dollar following the developments over the weekend. After the surprise announcement of a referendum on the bailout conditions by Greek PM Alexis Tsipras, the Eurogroup on Saturday decided not to extend the existing bailout beyond the current June 30 deadline. On Sunday, the European Central Bank announced that they will not be extending the emergency liquidity assistance and will be maintaining it at 89 billion euros. This forced the Greek government to impose capital controls and shut down the banks for a week, at least until the referendum, which is scheduled for July 5.

With IMF’s repayments due on June 30, a Greek default is looming and it is uncertain whether this would lead to the ECB withdrawing support altogether for Greek banks. Markets are expected to remain nervous in the build up to the referendum with the outcome looking highly uncertain as the Greek government remains strongly opposed to the latest bailout terms.

Periphery Eurozone government bond yields rose sharply on Monday when European trading opened. Spanish, Portuguese and Italian10-year bond yields jumped by over 11%, while Greek bond yields soared by 33%. Safe haven bonds such as German 10-Year bund yields fell by around 19%, while U.S. treasuries dropped by 6%. Gold prices benefited from the euro turmoil, jumping to $1,188 before easing to $1,180.

Chinese stock indices gave up initial gains to head lower in late Asian session as monetary stimulus measures announced on Sunday had only limited impact. The People’s Bank of China cut its one-year lending rate by 0.25% to 4.85% and its one year deposit rate also by 0.25% to 2%. Additionally, the capital reserve requirement ratio for certain banks was cut by 50 basis points. The central bank’s move comes after the Shanghai Composite index suffered its biggest fall since 1992 last week, falling over 20%. On Friday alone, shares in Shanghai had plunged by 7.4%.

Disappointing industrial production figures for Japan were offset by stronger-than-expected retail sales figures. Industrial production fell by 2.2% in May over the month, versus estimates of -0.8%. But retail sales rose by 1.7% in May from the previous month, against expectations of a 1% rise.

In the currency markets, the euro recovered some of its earlier losses to climb to 1.1090 against the dollar in late Asian session. It was a similar story for the single currency against the pound and the yen where it managed to make gains to 0.7066 and 136.36 respectively. The dollar was weaker against the yen, which benefited from safe haven status. The greenback hit a low of 122.09 before rebounding to 122.87. Cable started the day volatile as it hovered around the 1.57 handle. It was last trading at 1.5694.