Stock Traders Face Sucker Punch After Week of Greek Optimism

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For Europe stock traders who went all-in last week speculating on a Greek resolution, it’s time to rethink the strategy.

U.S. stock-index futures tumbled, and gains that pushed the Euro Stoxx 50 Index up 4.8 percent, including the largest one-day rally in three years, are at risk after Prime Minister Alexis Tsipras said he would put terms of the Greek bailout to voters. A Capital Markets Commission official said the Athens Stock Exchange will remain shut on Monday.

It’s a measure of how rapidly sentiment has shifted that the latest breakdown followed a week in which Greek shares posted their biggest increase since 2008, rising 16 percent. Six days ago, investors were celebrating signs the impasse was breaking as European policy makers said reforms submitted by Tsipras were a positive step.

“I would not be surprised if we see some selling pressure in equities,” said Manish Singh, head of investments at Crossbridge Capital in London. “Financials, particularly those in the periphery, and peripheral equities are most at risk.”

September E-mini contracts on the Standard & Poor’s 500 Index dropped 1.8 percent at 7:13 a.m. Tokyo time.

Deutsche Bank AG said in a note on Saturday the referendum was “particularly negative” for markets, noting that “big uncertainty begins.”

A gauge tracking Greek lenders rallied 33 percent last week, and the Euro Stoxx Banks Index gained 6 percent. Benchmark measures of Spanish and Portuguese equities climbed more than 3.5 percent, while Italy’s FTSE MIB Index jumped 4.9 percent, coming close to its highest level since 2009.

Whatever Necessary

Euro-area finance ministers meeting Saturday said they’d do whatever is necessary to ensure the financial stability of the currency region. The European Central Bank’s Governing Council agreed on Sunday to freeze the level of emergency liquidity assistance for Greek banks, which will remain closed on Monday.

The developments are another blow to European investors who have spent the last two months wondering what happened to the rally they began the year with. That advance sent benchmark measures up 15 percent or more in the first quarter as the ECB began buying bonds to stimulate the economy.

With a valuation of 15.6 times estimated profits, Euro Stoxx 50 companies are cheaper than those in the U.S. and Japan. Economists forecast gross domestic product in the euro area will expand 1.5 percent this year, the most since 2011, and analysts estimate earnings at its companies will increase more than 10 percent a year through 2017.

Short Lived

“We remain overweight continental European equities,” said William Hobbs, head of investment strategy at Barclays Plc’s wealth-management unit in London. “Our suspicion remains that Greece remains in the euro one way or another. We expect Greece-related volatility to be reasonably short-lived in nature for markets outside of Greece.”

U.S. investors have been pouring money into an exchange-traded fund tracking Greek equities all year. They added $37 million to the ETF in the five days ended Friday, the most since February. The benchmark ASE Index has rebounded 17 percent from an almost three-year low on June 17.

Greece, a country that accounts for less than 2 percent of the euro-area economy, has been dominating investor sentiment to a degree not seen in four years. A measure of correlation between the ASE and the Euro Stoxx 50 reached 0.7 on Friday, with 1 representing lockstep moves.

Bulls Benefiting

Over the past few days, that connection has benefited stock market bulls. A gauge of European stock volatility dropped 6.6 percent last week, and bets on future swings are projecting even calmer markets.

“The ECB has taken care of contagion, and economic numbers for the euro zone are getting better,” Crossbridge’s Singh said. “The only deadline that really matters is the one created by the ECB when they stop supporting Greek banks.”

Jason Goldberg, a fund manager at Pacific Investment Management Co., warned at the end of last week that investors had misjudged the potential for turbulence stemming from the Greek impasse. He cited a narrowing in the gap between European and American volatility futures over the next few months reflecting speculation stocks swings in the region would dissipate.

They’re “overestimating just how quickly the situation in Europe will be resolved,” Goldberg wrote on a Web post. “In our experience, problems of this magnitude do not get solved quickly.”

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