All eyes were on the media over the weekend as the markets were eagerly waiting for the outcome of the scheduled Eurogroup meeting on Saturday afternoon, whereby details of a rescue plan from Greece’s creditors was to be discussed with Greek officials. However, much to everyone’s surprise, Greek PM called a referendum and put the onus on his people on whether to accept the terms being imposed on the highly-indebted nation, after 5 long months of toing and froing, and negotiations satisfying neither camp. This news dampened investor sentiment throughout yesterday’s trading session, sending risky assets markedly lower, both credit and equities across the globe.

The outcome of the ongoing Greek has now reached a point of no return and is the most fragile it has ever been, as the risk averse investors took risk off the table and are expected to do so till at least referendum day, July 5.

To say that the Greek economy is in the doldrums is an understatement, but Saturday’s decision to call a referendum (as opposed to persist on further negotiations with its creditors) irked not only the creditors themselves but also the man in the (Greek) streets, and possibly beyond. And this saga is not only a test on the Greeks, it is also putting the relevance of the EU and the euro to the test.

Clearly, the markets will be keeping a close eye on developments in the Hellenic region with the climax to recent news being Sunday’s reference. Greece will continue to make headlines and take centre stage.

One key event over the weekend which was not given that much prominence thanks to Mr Tsipras’ referendum decisions, was China’s central bank’s decision to cut its key benchmark interest rate to a record low of 4.85%, its fourth such move since November. Much has been said of late about a possible bubble in Chinese equities, the likelihood of a hard landing, declining domestic demand and waning international investor sentiment.

And with the large (downward) moves witnessed in Chinese equity markets over the past two weeks (The Shanghai Composite declined by 7.4% alone last Friday), many interpreted the bank’s move as an accommodative measure of trying to re-instil market confidence in an economy which is being put to the test and showing clear signs of frailty. Despite this, the index shed yet another 3.3% during yesterday’s trading session.

Meanwhile, if we thought that the ECB has got only the Greek crisis to deal with we are mistaken, and how. Markets also had to contend with the news yesterday that inflation in Germany (HICP) for the month of June declined sharply, from 0.7% to 0.1% over the previous month, indicating that underlying price pressures have remained very subdued even in the euro-zone’s strongest economy. 

Furthermore, this indicates that inflation for the euro-zone to be released tomorrow might in fact reveal a sharper fall in inflation, yet another headache for the ECB as Draghi’s QE program was targeted primarily at achieving price inflation. What is certain is that the Greek crisis (exit or no exit) has the potential to derail the economic recovery in the region and potentially cause inflation to weaken even further. In view of this, we would not exclude the ECB seeing out the QE program in full and announce additional monetary policy support. 

Mark Vella is Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.