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 The worst fall in shares for six months and a 30 basis point rise in
bond yields for other southern euro zone states was the start of an
acid test of policymakers' hopes that, if Greece does go, the rest
of Europe is isolated from the fallout.
After an initial wave of selling, however, most markets recovered
ground. The one-day moves were large but looked pale in comparison
to the events of 2008 or the last major round of Greek-spurred
turmoil in 2011-12.
Wall Street was set to open around 1 percent lower while the FTSE
Eurofirst blue chip index was down by just over 2 percent overall.
"The European financial system now has much less exposure to Greece
than in 2011 and 2012," said Stephanie Flanders, Chief Market
Strategist for Europe at JP Morgan Asset Management.
"It is also better equipped to deal with contagion to other
countries -- and so are the countries themselves."
Greece's banks and stock market were closed on Monday and were
expected to remain so until after the July 5 snap referendum called
by Greek Prime Minister Alexis Tsipras on further austerity demanded
by euro zone partners.
The euro zone's banking index .SX7E fell 5.5 percent, with the worst
falls for Portuguese, Spanish and Italian lenders.
Adding to the gloomy backdrop, China shares dived another 3 percent,
bringing the losses in the past two weeks to 25 percent, with the
Chinese central bank's measures on Saturday to support the economy
failing to calm jittery investors.
BUY IN
By mid-morning in Europe, there were a number of voices arguing that
the sell-off represented an opportunity to buy shares cheaply in
markets into which the European Central Bank will pump billions of
extra euros over the next year.
"I think Greece will vote to remain in the euro, and the market
seems to agree with me," said Lex van Dam, a hedge fund manager at
Hampstead Capital. "I was a buyer on the initial dip this morning in
both the euro as well as the European stock markets, and continue to
remain constructive."
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The euro itself proved resilient, recovering much of a roughly 2
percent initial fall to trade just half a percent lower at $1.1102,
well within the past month's ranges.
It was helped by Switzerland's National Bank confirming it had
intervened to counter gains for the franc and by a fall in U.S.
Treasury yields that reflected speculation the Federal Reserve would
hold off for longer in raising interest rates if the trouble in
Europe worsens.
"Fed/ECB divergence bets have been partially wiped off as a result
of rising Grexit risk (and) less favorable USD rate differentials
slow dollar strength down," said Stephen Gallo, head of European FX
Strategy with BMO in London.
Gold prices gained 0.8 percent to $1,184.20 per ounce on safe-haven
buying, while Brent crude oil futures fell 1.4 percent to $62.38 per
barrel, hitting a three-week low.
(Additional reporting by John Geddie, Anirban Nag, Jemima Kelly and
Sudip Kar-Gupta in London, Nicola Saminather in Singapore and
Hideyuki Sano in Tokyo; Editing by Catherine Evans)
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