European markets open significantly lower on news of Greek capital controls and 5-Jul referendum

The announcement by Greek PM Tsipras late on Friday of the intention to hold a referendum on the creditors' proposals on the 5th July appears to have scuppered the possibility of a late agreement in advance of the imminent end-month bailout extension expiry. While efforts to return to the negotiating table are likely to continue, most critical for immediate market sentiment is the ECB's continued support to Greek banks; on Sunday, the ECB left unchanged the ELA's size and current Greek collateral haircut levels. 

Given the expected deposit flight, however, capital controls have been introduced alongside the extended closure of Greek banks until likely after the referendum date, and the ECB's decision will be revisited after the 30th of June. With Greece likely to enter arrears to the IMF without rendering the €1.55bn due at the end of the month, signs of any political will to agree and hence to maintain ECB support will remain pivotal to market sentiment, says Lloyds Bank.

With economic releases of distinctly secondary relevance to the mounting Greek event risk, Spanish and German inflation data for June are likely to send a conflicting signal on Eurozone inflation trends. Owing to an unfavourable base effect, German inflation is likely to dip; but Eurozone aggregate numbers due tomorrow should more closely mirror Spanish inflation trends suggesting a fading deflationary dynamic, adds Lloyds Bank.