6th July 2015
The FTSE opened down 1% this morning and European markets fell around 2% in early trading following the Greek referendum which rejected the terms of an international bailout.
The FTSE 100 is now around 8% down from its recent high on 27 April (when it closed at 7,104).
Initial reaction in the currency markets last night saw sterling rise by 1.25% against the euro, to stand at €1.4172. However, the euro sell-off hasn’t been as sharp as when the referendum was announced, and the exchange rate remains below the €1.4310 high reached last week, according to Hargreaves Lansdown. This time last year the exchange rate stood at €1.2614 per £1.
The result was 61.3% “No” to the austerity measures required by international creditors in order to offer the country more financial support. The “No” vote has prompted fears that the country could be forced to leave the eurozone. However, thousands celebrated the outcome on the streets of Athens last night and Prime Minister Alexis Tsipras said voters had made a “brave choice”.
The Greek finance minister Yanis Varoufakis has resigned despite the fact the Syriza had campaigned for a “no” vote, citing concerns that his involvement might be hindering negotiations. The Prime Minister said the decision was “potentially helpful to him in reaching an agreement” and added “I shall wear the creditors’ loathing with pride.”
Laith Khalaf, senior analyst, Hargreaves Lansdown, says: “The Greeks have knocked the ball firmly back to the rest of the eurozone, who now have to decide whether to continue the rally or simply walk off court. The next 48 hours promises to be a critical period for the future of Greece, and a volatile couple of days on the stock market.
“So far stock market reaction has been negative but not disastrous. This suggests a fair degree of pessimism over the Greek referendum result had already been priced into markets, after all this bolt has hardly come out of the blue.
“The stock market is renowned for being the only market in the world where falling prices aren’t met with applause. Investors should appraise the prudence of this instinctive reaction in the current situation. Things could well get worse for stocks in the coming days and weeks, but the market is significantly cheaper than it was a month ago, and on a long term view still looks attractive compared to bonds and cash.”
The currency market news will be welcomed by Brits travelling to Europe as £1,000 holiday spending money will buy an extra €155 this year compared to last.
Khalaf warns that investors should avoid making rash decisions over speculation of a Grexit.
He adds: “Investors should resist the urge to cash in their stock market investments, provided they are still in it for the long term. If you sell up every time there is bad news out there and buy back in when things look rosier, you’re probably going to lose out in the process.
“Those with cash to spare might consider putting some of it to work in the market, if they are saving for long term goals. Stocks may yet have further to fall, but the question for potential investors is not where markets will be in two weeks’ time, but in five to ten years’ time.
“Over this time period equities still look like a decent bet compared to cash paying close to zero in interest, and gilts yielding 2%.”