Greek Limbo Sets Up Another Monday to Watch in Markets

By Europe Dow Jones Newswires

Investors were facing another potentially manic Monday after the latest in a series of weekend twists and turns in Greece's debt crisis.

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A wave of optimism buoyed stocks in Europe and the U.S. at the end of last week as investors bet a deal between Greece and its creditors to keep the country in the eurozone was close. But after a weekend of setbacks, eurozone leaders headed into Sunday night talks with the prospects for a deal hanging in the balance.

"Markets are not going to like it," said François Savary, who oversees $11.4 billion as chief strategist at Swiss bank Reyl.

Investors were gearing up for the third Monday in a row where weekend developments in the Greek crisis were expected to set the tone for markets. In early Asian trading Monday, the euro fell 0.5% against the U.S. dollar.

A statement prepared by the currency union's finance ministers seen by The Wall Street Journal said negotiations on a new rescue for Greece could only start once the Parliament in Athens had passed pension overhauls and sales-tax increases, along with further financial-policy measures.

Two weeks ago, many major European indexes suffered their worst routs in years on the first trading day after Greek Prime Minister Alexis Tsipras announced the country would hold a referendum on whether to accept the terms of Greece's creditors to unlock financial aid. The selling spilled over into U.S. stocks, handing the Dow Jones Industrial Average its biggest one-day percentage decline since October.

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Markets fell sharply again last Monday after Greeks voted overwhelmingly to reject those demands.

"It is, again, more complex than markets thought," said Valentijn van Nieuwenhuijzen, head of multiasset strategy at NN Investment Partners, which has around EUR203 billion ($230 billion) in assets under management.

But while Greece's protracted negotiations turned investors more cautious on assets in the eurozone and beyond, there has been little sign of a crisis in markets.

The Euro Stoxx 50, a benchmark index of blue-chip firms in the eurozone, is up 0.7% in the month to Friday's close. Greece's stock market has been closed, along with the country's banks, since June 29.

Bonds in Italy, Spain, and Portugal--the countries seen as most at risk from a potential Greek departure from the eurozone--have wobbled, but by Friday's close had clawed back the losses made over the last month. The scale of the selling had been modest compared with the height of the region's debt crisis in 2011 and 2012.

Investors are placing much of their faith in the European Central Bank, which they believe could beef up its bond-buying stimulus program to contain any more dramatic spillover from Greece into other eurozone countries' debt.

For markets, the lack of a deal "will be a setback from late last week, but no reason for full panic," said Mr. van Nieuwenhuijzen.

Sunday's deadline for a Greek deal was self-imposed by European policy makers. But firmer deadlines await, with Greece facing a hefty debt repayment to the ECB on July 20.

If the country does eventually leave the eurozone, investors will likely face a sterner test of their faith that the crisis can be contained.

For now, markets will focus on the progress of negotiations over the next few days, according to Mads Pedersen, head of discretionary asset allocation at UBS Wealth Management, which oversees around $2 trillion of assets.

"It looks to be another volatile week," he said.

Write to Tommy Stubbington at tommy.stubbington@wsj.com

Josie Cox contributed to this article.