Greek drama

Events are moving swiftly since I published yesterday my first reactions to the breakdown of the Greek negotiations. The most important development since has been the closure of the Greek banks tomorrow, which will probably last all week. Capital controls are bound to introduced, haircuts are probable on large deposits and the banks will have to be nationalised. Perhaps surprisingly, it seems very possible that a majority may vote in next Sunday's referendum effectively to stay in Europe despite the Syriza-led government campaigning against accepting any terms from the undemocratic forces of darkness (i.e. everyone else). Mr Tsipras says he would respect such a decision but the other EuroGroup and troika no longer trust him and the formation of a new government of national unity appears to be one of the aims of their ultimatum last week. Even then, any new deal would be very limited and unlikely to win parliamentary approval in all the other EMU member states. In the meantime, the Greek government is likely to run out of money to pay pensions and public sector salaries: it has already stopped paying suppliers, many of which are going bust, and businesses and individual taxpayers are withholding their dues. In other words, Grexit is inevitable even if the timing and mechanics are far from clear and it appears that the EuroGroup et al are decreasingly uncomfortable with that outcome. How long, however, before the domino theories of other exits start to circulate?

Ever cheery, Zerohedge have just published this chart showing how hard the ECB could be hit by Grexit. No doubt, Mr Draghi thought about this as he let the Greek banks run their tab up to €89bn.

Chinese chequers

Meanwhile, over the week-end has come news from another potential flashpoint. After last week's plunge in domestic equities the PBoC, having encouraged speculation so far, has stepped in with further support via yet another cut in the benchmark one-year loan and deposit rates and in the Reserve Requirement Ratio for some banks.  Whether this really will calm the punters or actually worry them even more will shortly be revealed. The chart below compares the progress of the Shanghai Composite so far in 2015 with that in 2007 prior to its crash in early 2008. On Friday the market fell by 7.4% with trading suspended in well over half of all constituent companies as the 10% circuit breakers kicked in.

Witching hours

Yesterday, I remarked on complacency in European markets but this already seems to be changing as trading indices are marking down the DAX, DJIA and FTSE 100. There could be even more damage in the sovereign bond market where Mr Draghi's 'whatever it takes' commitment to euro irreversibility has been the corner stone of prices. The coincidence of the sell-off in Shanghai could scarcely be more unfortunate and, of course, Tuesday is the last business day of Q2. This makes the news from the US more important than ever and here the worry remains over when the FOMC starts to raise interest rates. In the current central bank-obsessed markets, strong economic data could well be unwelcome as it might push the procrastinating FOMC over the edge.  Last week brought the expected upwards revision to Q1 GDP, strong Personal Spending and another tick up for the Atlanta Fed's Q1 GDP Nowcast. This puts the spotlight even more on this week's BIG NUMBER on Friday in the form of the Non-Farm Payrolls but the jitters may get serious as soon as Wednesday if the ADP Private Sector Payrolls come out too high (rate rise in September) or too low (faltering US growth). Fortunately, 'Goldilocks' numbers are more likely than not. The other main US data due are the ISM surveys but despite their importance these rarely move markets unless, of course, they are already in a panic. In this atmosphere mildly encouraging Inflation, Employment and Retail Sales numbers from the EZ and an upwards revision to the UK's Q! GDP will probably fall on ears deafened by thundering hooves heading for the exit across many markets. Or maybe heads are too firmly buried in the sand?