Grexit unlikely to trigger a significant contagion – BAML

FXStreet (Barcelona) – European Equity Strategists at BofA-Merril Lynch, view that the Equity markets could easily fall to around 5%, but possible actions by ECB might limit the contagion on a probable Grexit.

Key Quotes

“We suggested that a Greek referendum might well be an outcome this weekend, as it has proven to be. Nevertheless, the facts that there were no further negotiations to find a compromise and that the Syriza led government are proposing a no vote has led to a dramatic deterioration in the situation over the weekend.”

“Given we felt that the risks for equity markets were broadly symmetric running into the weekend, the reaction on Monday is likely to be a risk off one. Equity markets could easily fall 5% or so to revisit the lows of 3400 seen on the Eurostoxx ten days or so ago, when an adverse outcome seemed to be priced in.”

“It is possible that the Greek public will vote yes to the proposals, in which case we might be in a situation where a new government will likely need to be put in place to do a deal with the creditors. This would probably be taken well by investors as it would significantly reduce the risk of Greece leaving the euro”

“Our economists have argued that it is likely that the ECB would tweak QE to support peripheral bond markets. Given our view that even a Grexit would be unlikely to trigger contagion on a significant scale, we would expect such support of bond markets to act to stabilise equity markets too.”

European Equity Strategists at BofA-Merril Lynch, view that the Equity markets could easily fall to around 5%, but possible actions by ECB might limit the contagion on a probable Grexit.

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