Fast Money” trader Brian Kelly on the fallout from this weekend’s Greek news:
The bottom line is BK expects European equity markets to fall and peripheral bond yields to rise.US bond yields will fall and equity markets will likely follow European counterparts lower.
Markets Will React Badly to Lost ECB Credibility
The most immediate impact will be felt in the fixed income markets, especially peripheral bond markets. Mario Draghi has famously pledged to do “whatever it takes” to keep the Eurozone together, but capping the ELA and allowing capital controls will cause investors to question that pledge.
The ECB is in danger of losing its credibility with the markets – however, this loss of credibility will likely only result in wider bond spreads as opposed to a broader contagion. In other words, investors will begin to reprice the risk of capital controls in Italy, Spain or even France. This is not to say that the probability of contagion is high, just that it was priced at zero last week and now the markets will adjust those expectations
September US Rate Hike Off the Table
The second market impact will be felt in the US interest markets where traders have been positioned for a September rate increase. Since this crisis will play out over the next month it has the potential to erode confidence in the European economy which could weigh on US economic sentiment. More importantly the FOMC statements specifically mentioned global economic events as a reason to remain Dovish at the June 2015 meeting.