Markets are getting oversold on renewed concerns of a Greek "accident" and a marked increase is seen in bond volatility. Last week we saw a stand-off between the EU authorities and Greece's government. Central case remains that a deal is done but it is going to be a bumpy ride for markets in the near term.
With the DAX now 10% off its April high, markets offer a better risk-reward profile. Should an agreement be reached on Greece, we would expect a sharp rally of the order of 5%. As we have said before, we see downside risks being limited, even in the event of an "accident", because the ECB is able to intervene to limit the risk of contagion, notes BofA Merrill Lynch
"Our economists think markets overreacted to this and that the ECB has no desire to see bond yields significantly higher. Low rates and a low euro remain key to the ECB QE programme's success, so we see limited scope for either to move markedly higher without the ECB coming in to calm things down." adds BofA Merrill Lynch
