19 Jun 2015
What happens to European equities if Greece defaults? – BAML
FXStreet (Barcelona) - Equity Strategists at BofA-Merrill Lynch, believe that the risk of any Grexit contagion will likely be limited, and further suggests options based strategies to position for this risk.
Key Quotes
“Our conviction remains the same. We think the rally in markets from a positive outcome is likely to exceed a comparative selloff on bad news.”
“Our working assumption is that the bulk of Greek government risk has been moved off of bank balance sheets on to those of Eurozone governments and the ECB. Accordingly, we believe contagion effects even from a Grexit are likely to be limited.”
“We also assume the ECB would intervene aggressively in markets to prevent any marked deterioration in peripheral spreads and maintain the stimulus from the QE programme. While our economists think the ECB would achieve this by varying the QE programme, the fact that OMT was approved by the European Court this week should give the markets more confidence that the ECB will be successful in round two of "whatever it takes".”
“In our view, the worst scenario for markets would be ongoing uncertainty on whether Greece has defaulted, the possible implications and whether they have to exit the Eurozone. Whether the Greek authorities will have the luxury of such time remains to be seen.”
“In summary, we are inclined to look for equity markets to eventually go higher following the resolution of the current standoff. However, the path leading us there remains very uncertain. This suggests that those who want to position for such an outcome should do so via the options market. Given our view that any rally in markets would likely be capped as we move into the second half of the year (as Fed tightening comes into focus) and the current richness of volatility, call spreads would seem the most sensible way to do this.”
“For those more worried about an initial adverse outcome, it would equally suggest put spreads as the appropriate hedge.”
Key Quotes
“Our conviction remains the same. We think the rally in markets from a positive outcome is likely to exceed a comparative selloff on bad news.”
“Our working assumption is that the bulk of Greek government risk has been moved off of bank balance sheets on to those of Eurozone governments and the ECB. Accordingly, we believe contagion effects even from a Grexit are likely to be limited.”
“We also assume the ECB would intervene aggressively in markets to prevent any marked deterioration in peripheral spreads and maintain the stimulus from the QE programme. While our economists think the ECB would achieve this by varying the QE programme, the fact that OMT was approved by the European Court this week should give the markets more confidence that the ECB will be successful in round two of "whatever it takes".”
“In our view, the worst scenario for markets would be ongoing uncertainty on whether Greece has defaulted, the possible implications and whether they have to exit the Eurozone. Whether the Greek authorities will have the luxury of such time remains to be seen.”
“In summary, we are inclined to look for equity markets to eventually go higher following the resolution of the current standoff. However, the path leading us there remains very uncertain. This suggests that those who want to position for such an outcome should do so via the options market. Given our view that any rally in markets would likely be capped as we move into the second half of the year (as Fed tightening comes into focus) and the current richness of volatility, call spreads would seem the most sensible way to do this.”
“For those more worried about an initial adverse outcome, it would equally suggest put spreads as the appropriate hedge.”