There is a degree of calm that has come over the markets in the past day or so. The Greeks have said they will be submitting their proposal to the Eurozone leaders by Friday’s deadline. Rumour is that they might even have this one typed up! Core/peripheral sovereign bonds spreads in the Eurozone have settled back again and equity markets are into the second day of a rebound. You never know, the Eurozone leaders may be so desperate/bored/tired (delete as appropriate) enough to even accept the proposal. However, once more, as we approach the weekend (of course there is still tomorrow to go), you can be assured that the volatility will be huge on Monday, which ever way the negotiations go. With Greece surely approaching the end game over a potential Grexit, this is likely to be the calm before the storm.
Nobody knows how the negotations are going to pan out over the weekend. Snippets from Eurozone officials would have you believe that they are prepared for a Grexit and it can be contained. However you can bet your bottom dollar that traders will not be so sanguine on Monday. It is possible that in time, the measures put in place by the ECB (QE, banks better equipped to cope with the shock, Draghi’s “whatever it takes” and the Outright Monetary Transactions) will be able to contain the contagion. However, on Monday we will, in effect, know if Greece will leave the Eurozone or not and it will certainly be a momentous day. So, in the near term there will be huge volatility at the shock.
The chart of 1 week EUR/USD implied volatility has again pushed higher today (up by 4% on the day). It is now around a 6 month high and is the highest level since January (the time when Draghi pulled the trigger on the ECB’s big QE bazooka).
The chart also shows that the previous two spikes in implied volatility came on the days where the markets were their most concerned over Greece (the Monday after the announcement of the referendum, and the Monday after the result of the referendum). This suggests that although there is an almost eerie calm over trading this morning, traders are already getting ready for a tumultuous day on Monday. You should probably batten down the hatches, this is the calm before the storm – volatility is coming!