European markets are set to open higher this morning with a massive gap towards the upside and this is on the back of the optimism that the new deal submitted by Greece will be accepted by the creditors. So many proposals have been submitted in the past and very single one of them have increased the market participants hopes that perhaps this one will be agreed between the two parties, but unfortunately, every time there was no fruit at the end of that.
Similarly, once again the hopes are that perhaps this is the deal, which will carry us out of this Greek saga and finally we will be able to kick the can down the road. The reason we are saying that -this is going to be kicking the can down the road is, because if you really want to resolve the Greek debt problem, creditors will have to accept that they need to forgive some debt and debt restructuring is not only part of that equation. In order for them to balance this equation once for all, debt relief must be given to Greece and without this it will be only a matter of time before we face the very same problems again the only difference will be that there will be more frustrating at that particular moment.
Nonetheless, the proposal submitted by Greece this time does seem to have a real strong foundation and it appears that they have taken a massive step back on the thorniest issues, which made the negotiation to fall out previously. It also raises the question if they were going to back down from their ground this much, why the Greek officials carried out a referendum and faced this much volatility, which resulted further downgrade in their credit rating due to not paying their IMF bill.
Going into the weekend, we could see once again the risk aversion attitude by investors as Sunday stands as the final official deadline for Greece and both parties will have to agree on a deal if the Greek banks wants to see the day light ever. The banking sector is completely strapped for cash and without the ECB’s help, there is no hope of them opening up. The cash withdrawal despite the daily limit or capital control has made the situation even worse for these banks and uncles they get fresh funding, it is difficult for these banks to stay operational.
Therefore, today will be once again one of those days where every headline on the Greek proposal will cause the market to panic and we are expecting massive volatility once again. If there is a deal and we do see optimism from creditors and they do accept this deal and the can is kicked down the road, we are expecting a massive rally for the equity market going forward and the next major concern for the market will be Chinese sell off not the Greek saga.
We are also expecting some relief rally for the euro, which has been under tremendous pressure lately and all focus will be towards the ECB meeting which will take place next week. As for gold, we could see some more sell off if there is a deal between the two parties, however the sell off may not pick up the steam due the on going worries of the Chinese stock market, which could take a shape of a tornado and markets have never experienced this kind in the past.