European bonds and stocks on the defensive before tight Greek vote

July 3
8:19 AM 2015

European bonds and stocks traded cautiously on Friday before a Greek referendum on EU-prescribed reforms that could determine the country's future in the euro zone and which polls suggest could go either way.

Yields on top-rated German 10-year Bunds, the benchmark for European borrowing costs, fell as some investors chose to preserve their capital in low-yielding but relatively safe assets. European stocks dipped and were set for the biggest weekly drop in two months, while the euro edged higher.

The moves were marginal, though, as investors did not want to position too heavily on either side.

"The European market is frozen ahead of the Greek referendum," said Markus Allenspach, head fixed income research at Julius Baer.

Supporters of Greece's bailout terms have taken a wafer-thin lead over the "No" vote backed by the leftist government, 48 hours before Sunday's referendum, an opinion poll showed.

The poll by the respected ALCO institute for newspaper Ethnos put the "Yes" camp on 44.8 percent against 43.4 percent for "No". But the lead was within the pollster's 3.1 percentage point margin of error, and 11.8 percent of respondents said they were still undecided.

"Attention will be pinned on Greece and this is likely to see investors cautious as we head into the weekend ... Even if we get a Yes' vote, this means the country must go back to the negotiation table and try to knock something together again," IG market analyst Stan Shamu said.

"However, it's a lot worse on the other side as a 'No' vote will present a host of uncertainties that could really rattle markets ... Either way, traders will need to buckle up for a tumultuous Monday."

Bund yields DE10YT=TWEB were down 3 basis points at 0.83 percent. The FTSEurofirst 300 .FTEU3 edged 0.25 percent lower to 1,524.05 points, down 3.1 percent for the week.

In lower-rated euro zone bond markets, Italian IT10YT=TWEB and Spanish 10-year yields ES10YT=TWEB were down around 2 bps on the day, both at 2.30 percent, having pulled away from German equivalents by around 30 bps over the course of the week.

The euro EUR= rose 0.1 percent to $1.1097.

Many investors were lightening up positions and staying on the sidelines.

"It's far from obvious which way it is going to go...and you definitely couldn't position on the back of that at the moment," said Thomas Laskey, an investment manager at Aberdeen Asset Management.

While Europe was fixated on Greece, a rout in Chinese stock markets continued. Chinese markets, which had risen as much as 110 percent from November to a peak in June, have collapsed since June 12, losing more than 20 percent.

The Shanghai Composite Index .SSEC was down 5.8 percent, while the CSI300 Index.CSI300 fell 5.4 percent.


The dollar fell against a basket of currencies .DXY on Friday, hurt by softer-than-expected U.S. employment data.

The U.S. payrolls report showed employers hired 223,000 workers last month, fewer than the 230,000 increase forecast in a Reuters poll. The government also downgraded its reading on April and May job growth while wage growth remained subdued.

The dollar index was down 0.11 percent at 95.006 .DXY, retreating from a four-week high of 96.422. The dollar was buying 122.93 yen JPY=, down slightly on the day.

"With liquidity thin and the Greek referendum coming up, not many would want to take large positions going into the weekend. The U.S. jobs report has taken the wind out of the sails for the dollar for the time being," said Alvin Tan, currency strategist at Societe Generale.

Oil prices dropped as a rising U.S. rig count stoked fears of oversupply. Brent crude LCOc1 was down 45 cents at $61.62 a barrel, while U.S. crude CLc1 was $56.56, down 37 cents. [O/R]

Spot gold XAU= bounced off a 3-1/2 month low. [GOL/]

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