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European bank stocks and borrowing costs for Italy, Spain and Portugal bore the brunt on Monday of financial markets' fright at the growing risk that Greece will leave the euro.
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. [.SS]
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."
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.
Source: REUTERS
