Stocks posted a loss last week as markets reacted to news of the surprise referendum in Greece and expectations that Greece would not make its IMF debt payment. Last Monday was the worst one-day drop for stocks all year. All the major markets around the world plunged. Asian markets were down -2% to -3%. European markets were down -3.5% to -4%. All of the U.S. indices were down more than -2% with Monday's widespread drop toward three-month lows. Fortunately there was no follow through lower in the U.S. The market bounced off Monday lows but gains were mild. Everyone is waiting for the results of the Greek referendum vote.

The market's weakness was broad based. Transports fell -1.4% for the week. The semiconductor SOX index lost -1.8%. The normally bullish biotech stocks dropped -1.6%. Banking stocks fell -1.8%. A -5.1% plunge in WTI crude oil weighed heavily on the energy stocks. The oil index declined -2.2% last week while oil service names fell -3.9%. The U.S. dollar posted a gain for the week and that put pressure on all of the commodities. The safety trade pushed money into U.S. bonds last Monday but the bond market rally had pared its gains by Thursday. Yields on the 10-year note settled at 2.39%. The bond market could see a lot more volatility in the week ahead as investors react to the Greek vote to accept the EU's new bailout terms.


Greece was the major story last week, which should be no surprise. There was a flurry of attempts at last minute deals by the Greek government. However, after Greek Prime Minister Alexis Tsipras surprised the world with his declaration of a referendum the prior weekend, his country's creditors gave him and any new proposals the cold shoulder. German Chancellor Angela Merkel said that her country cannot evaluate any new proposals until after the July 5th referendum vote. On June 30th Greece failed to make its 1.6 billion euro debt payment to the International Monetary Fund (IMF) essentially creating a sovereign debt default.

One of the biggest surprises last week was the IMF report that Greece will needs tens of billions of euros in additional bailout funds to survive. According to some news reports the EU tried to pressure the IMF to not release this new report before the July 5th referendum for fear it would influence the vote. What's interesting is that multiple news agencies, all quoting the same IMF report, provided different figures. Bloomberg said that the IMF report suggests Greece will need an additional 36 billion euros over the next three years to survive. Reuters said that number was 50 billion euros. The Wall Street Journal reported it was 60 billion euros. The IMF is suggesting that any new bailout agreement has a 20-year grace period before any repayment begins. Plus they're suggesting that the EU and the rest of Greece's main creditors (ECB and IMF) will need to consider some debt forgiveness and reduce Greece's outstanding balance. Different analysts have suggested this haircut on Greek debt could range from 30% to 75% if Greece is ever going to pay it back. Otherwise, with Greece's current debt burden of 185% of GDP, the country will never be able to dig itself out from its debt burdens.

There were a number of protests in the Greek capital throughout the week by different groups. Some were urging a yes vote while others were campaigning for a no vote. The vote is whether to accept new bailout terms but most view it as a vote on whether or not to stay in the Eurozone. Over the last few weeks we have consistently seen polls that suggest 70% of Greeks want to stay in the euro. However, as of this weekend, polls showed Greeks were 41.7% in favor of voting yes and 41.1% in favor of no (virtually dead even). EU leaders are hoping a "yes" vote means that PM Alexis Tsipras will step down and Greece will elect a more cooperative government. Meanwhile Tsipras and his radical leftwing Syriza party has been campaigning for Greeks to vote no.

If the country does vote no it could be an economic and humanitarian disaster. There were multiple stories about how the entire country was shutting down. The banks have been closed all week. Citizens were only allowed to withdraw 60 euros a day and that had been reduced to 50 euros a day by this weekend. The Greek banks were down to their last 500 million euros. Hundreds of ATMs were out of cash. There is a shortage of 20 euro notes. Gas stations had stopped taking credit cards. Restaurants were closing because they couldn't order more food supplies. Businesses were closing because they couldn't import new supplies. Other businesses were closing because they couldn't pay employees. Hospitals were running low on medical supplies and postponing or cancelling medical procedures. Some areas of the country had seen their garbage collection halted.

Greek Bank "Bail-in"?

If the above situation doesn't sound dire enough there were new stories over the weekend that the Greek government was considering a "bail-in" to prevent the banks from failing. The last time we saw a "bail-in" was the island country of Cyprus in 2013. Cyprus went through their own financial meltdown and the government essentially confiscated money from depositors to shore up bank balance sheets and prevent a collapse.

Now Greece might be forced to do the same thing. The Financial Times reported that Greece was considering a "bail-in" of up to 30% on all deposits over 8,000 euros and 10% below that amount. Imagine being a Greek citizen that had saved up 100,000 euros. This Monday you could wake up and find your account balance at 70,000. Greek Finance Minister Yanis Varoufakis reacted to the FT story and called the bail in a "malicious rumor". He may face a credibility issue since last weekend he said Greek banks would open on Monday. The banks did not open and have been closed all week.

Greeks Vote No

As of Sunday night it looks like the Greek people have voted "no" on the referendum. Assuming the ballots have not been tampered with it looks like 61% of the Greek population has voted "no". Only 38% voted yes with 97% of the vote counted so far. It's a bit of a shock with multiple polls prior to the vote suggesting the majority of Greeks saying they want to stay in the Eurozone. This majority vote rejects EU's call for more austerity. Greek PM Tsipras called it a "victory for democracy".

Jeroen Dijsselbloem, President of the Eurozone Finance Ministers meeting known as the Eurogroup, said the vote was "very regrettable for the future of Greece." Other EU finance leaders said that this no vote makes any future negotiations with Greece exceedingly difficult.

This is uncharted territory for the 19-member Eurozone. It is widely assumed that Greece will be forced to leave the euro, which is something no country has done in the 16-year history of the union. The euro currency was down sharply following the referendum results and currently trading near $1.09. Bloomberg is reporting that German Chancellor Merkel has already scheduled a Monday meeting in Paris with French President Hollande to discuss the EU's next move following Sunday's vote in Greece.

Economic Data

There were a number of economic reports out last week. The Chicago PMI improved from 46.2 in May to 49.4 in June. Construction spending in the U.S. rose +0.8% in May, up from +2.1% in April. The Case-Shiller 20-city home price index rose +4.9% in April that follows a +5% jump in March.

The ISM manufacturing index rose from 52.8 in May to 53.5 in June. Numbers above 50 suggest growth in the ISM while the Chicago PMI is still in recession territory. Factory Orders fell -1.0% in May. That follows a -0.4% drop in April. Meanwhile the Conference Board's Consumer Confidence Index surged from 94.6 in May to 101.4 in June.

The U.S. continues to see job growth. The ADP National Employment Report said the country added +237,000 private jobs in June. That boosted confidence for the government's nonfarm payroll (jobs) report on Thursday. Forecasts for the jobs report rose from +225K to +230K. According to the BLS the U.S. only added +223,000, slightly below estimates. May's number was revised lower from +280K to +254K. April was also revised lower from +221K to +187K.

The unemployment rate fell from 5.5% to 5.3%, the lowest level since April 2008. Unfortunately that's not because the labor market improved. It's because over 400,000 people left the labor force. The labor force participation rate dropped from a four-month high in May at 62.9% down to 62.6%, which is a new 38-year low. The broader and likely more accurate reading on unemployment is the U6 rate, which rose from 10.4% to 10.8%.

Overseas Economic Data

It was a quiet week for economic data overseas. Most of it was overshadowed by the Greek story anyway. The Eurozone reported their Producer Price Index (PPI) for May was flat for the month but down -2.0% year over year. Their Consumer Price Index (CPI) for June was up +0.2% for the month. Germany reported their manufacturing PMI for June was flat at 51.9. The Eurozone's manufacturing PMI for June was also flat at 52.5. Numbers above 50.0 suggest growth. The unemployment rate in the Eurozone was unchanged at 11.1%.

Japan reported their industrial production for May was down -2.2% from the prior month. The country's retail sales were up +3.0% in May, which was better than expected. China made a number of headlines last week. The Chinese central bank cut their benchmark lending rate and their deposit rate by 25 basis points to 4.85% and 2.0%, respectively. China's manufacturing PMI was unchanged at 50.2 in June. The HSBC Chinese manufacturing PMI slipped from 49.6 to 49.4.

Chinese Stock Market Crash

The biggest story was the Chinese market crash. The Chinese stock market has been plunging and lost another -5.7% on Friday (July 3rd). The Shanghai index is now down -29% from its peak on June 12th. That's the worst three-week drop since 1992. Right now everyone is focused on Greece but China's main stock market just lost -$2.5 trillion in wealth. That's about ten times Greece's GDP.

A market strategist in Singapore said the mood among investors is verging on panic. That's bad news for the 90 million individual investors in China. The prior twelve months saw the Chinese market more than double. Chinese investors were opening up new accounts by the millions and the use of margin debt exploded. Now most of those investors are facing their first bear market.

The Chinese government is stepping up their attempts to try and stop the sell-off. Authorities have promised to investigate any market manipulation that has fueled the sell-off. This weekend China's biggest brokerage firms promised to spend 120 billion yuan (about $19 billion) to buy stocks and they pledged to not sell with the Shanghai index below 4,500. Today the Shanghai is trading under 3,700. If that wasn't enough 94 Chinese mutual fund companies said they would buy more stock. Unfortunately the amount of money that has been pledged to buy stocks may be a drop in the bucket. Recent estimates suggest that margin debt in the stock market has hit four trillion yuan.

Major Indices:

June does not have a strong history for market gains and this year the seasonal trend took over thanks to Greece. The S&P 500 lost -1.1% for the week and -2.1% for the month of June. That left the big cap index with a -0.24% decline for the quarter, which snaps a winning streak of nine quarterly gains in a row. Year to date the S&P 500's gain is down to +0.8%. At the closing bell on June 30th the S&P 500 was only up +0.2% for the year, which made it the smallest first half gain on record.

Last week the S&P 500 found support near 2,056. On a short-term basis I'm worried the current bounce is only a bear-flag consolidation pattern before the index continues lower. Last week's drop pushed the S&P 500 to new three-month lows.

The next level of support, assuming the 200-dma fails near 2,055, would be the March lows near 2,040. If 2,040 fails then we could be looking at a drop toward the 1,980-2,000 area.

chart of the S&P 500 index:

The NASDAQ did not fare well on Monday's big drop. The NASDAQ composite had already started to contract prior to the sell-off. The index posted a -1.4% loss for the week, which trimmed its 2015 gains down to +5.8%.

Broken support at the 50-dma is now new resistance around 5,050. If the sell-off continues the next support level is probably the 4,900 area. Below that the 4,800 level with its 200-dma is potential support.

chart of the NASDAQ Composite index:

Two weeks ago the small cap Russell 2000 index ($RUT) was hitting all-time highs. It's already seen a -3.6% pullback with declines in five of the last seven trading days. The index fell to technical support at its 100-dma this past week. The bullish trend line of higher lows appears to be in jeopardy. Should this weakness continue the nearest support is probably in the 1,200-1,220 area. Year to date the $RUT's gain has fallen to +3.6%.

chart of the Russell 2000 index

Economic Data & Event Calendar

The week ahead has a few key events although they may not immediately move the market. The G8 meeting starts on Tuesday. Tuesday is also the newest deadline for the Iran nuclear negotiations. Investors will probably pay more attention to the FOMC minutes on Wednesday in hopes of discerning any clues on when the Fed will raise rates next.

The Q2 earnings season officially begins on Wednesday, July 8th. The pace of earnings doesn't really pick up until the next week. There will be multiple Federal Reserve members speaking this week at various events. Fed Chairman Janet Yellen speaks on July 10th, which will likely grab the market's attention.

- Monday, July 06 -
ISM Services

- Tuesday, July 07 -
U.S. Trade Balance data
Latest deadline for Iran nuclear negotiations
G8 Meeting

- Wednesday, July 08 -
FOMC Minutes from last meeting
Q2 earnings season begins

- Thursday, July 09 -
Bank of England rate decision

- Friday, July 10 -
Wholesale Inventory data

Additional dates to be aware of:

July 16th - ECB interest rate decision
July 16th - ECB President Mario Draghi press conference
July 29th - FOMC meeting (end of two-day meeting)

Looking Ahead:

Investors sentiment has flip-flopped. Last weekend we saw a jump in bullish sentiment from about 25% to 35%. This weekend that bullish sentiment has vanished. The latest poll by the American Association of Individual Investors (AAII) shows bullish sentiment falling -12.9 points to 22.6%. It was the biggest one-week drop in over two years. Bearish sentiment surged from 21.7% a week ago to 35.1% today. This is the largest one-week surge in almost two years. Neutral sentiment was nearly unchanged at 42.3%. Last week is the 14th week in a row that bullish sentiment has been under the long-term average of 38.8%. I'm sure that we can blame Greece for this reversal.

Iran Nuclear Negotiations

Investors may want to keep an eye on the Iran nuke talks. The current negotiations have been going on for about two years. June 30th was supposed to be a hard, unflinching deadline to get a deal done. Naturally the deadline failed. The Iranians are experts at delaying any deal. Today the new deadline is July 7th.

Why should traders pay attention to this? If negotiations succeed then crude oil prices will likely plunge. A deal means sanctions on Iran will be relaxed and they'll be able to sell more oil on the global market. If negotiations fail then oil could rise but it will also generate a significant amount of geopolitical risk. This past week there have been multiple stories in the news about how the U.S. is stockpiling bunker-busting bombs if negotiations fail. Short of nuclear weapons, these are the biggest bombs that the U.S. makes. They're 20 feet long and weigh 15 tons each. Odds are the U.S. has been using this story in the press to pressure Iran to agree to a deal.


The problem with Russia hasn't gone away either. Europe recently renewed their sanctions against Russia. This past week there is new video of a buildup of Russian military equipment inside the Donetsk region of Ukraine. Plus, Russia has cut off natural gas supplies to Ukraine as the two countries bicker over prices again.

This Week

Stocks could see another knee-jerk reaction lower on Monday as investors react to the "no" vote in Greece. Greek PM Tsipras will feel empowered by his people to resist any new austerity suggested by creditors, which will make negotiations likely impossible. Odds of Greece leaving the Eurozone just surged significantly.

On the plus side, if there is a plus side to the Greece news this weekend, is that the Federal Reserve will likely use Greece and any economic fallout from the situation as a reason to delay raising rates in 2015. The U.S. market is still addicted to low rates so this should be bullish.

~ James