By Tommy Stubbington and Josie Cox
Stocks and bonds in Europe fell on Monday after Greece's voters
set the country on a collision course with the rest of the
eurozone, but it wasn't the heavy selloff predicted by many
investors.
Greece's rejection of creditors' demands in Sunday's referendum
appears to have pushed the country closer to an exit from the
currency bloc. But with the Greek government expected to return to
the negotiating table for further unpredictable talks, investors
have shied away from big bets.
In the background, many fund managers assumed the European
Central Bank would act swiftly to contain any fallout from the
Greek crisis.
The result is a now familiar pattern: Markets are reacting with
trepidation but not panic.
"We keep having these defining moments. We get past them and
they don't seem to have defined very much," said Paul Lambert, head
of currency at Insight Investment, which manages GBP397.2 billion
($618 billion).
"Until Greece's creditors close the door to a new deal,
investors will be reluctant to draw any conclusions," he added.
The pan-European Stoxx Europe 600 was 1.2% lower early Monday
afternoon. In the U.S., the S&P 500 fell 0.5% in early
trade.
Italy and Spain--two of the countries seen as most at risk from
the Greek crisis--were hardest hit, with losses concentrated in
banking stocks.
Milan's FTSE MIB index fell 3.7% and Madrid's IBEX 35 lost 2.3%.
Greece's stock markets were closed last week and won't reopen until
Tuesday at the earliest, along with the country's banks.
The euro initially tumbled before rebounding slightly. It traded
0.7% lower against the dollar at $1.1032 Monday, slightly above the
lowest level it hit last week.
Crucially, the reaction in bond markets was mild.
Bonds issued by highly indebted Southern European countries have
in the past been vulnerable to fears that a Greek exit from the
eurozone could foreshadow a wider breakup of the currency bloc.
Many had expected those fears to return after the Greek
vote.
However, Spanish and Italian 10-year bond yields climbed by
around 0.1 percentage point to 2.32% and 2.35% respectively, below
their recent highs. Yields rise as prices fall.
German bonds, which are seen as a haven by investors, gained.
Germany's 10-year yield was 0.05 percentage point lower at
0.75%.
"Given what has happened it seems a very muted move," said
Daniel Loughney, a portfolio manager at AllianceBernstein, which
manages $500 billion of assets. But Mr. Loughney doesn't want to
make any negative bets on Italian or Spanish debt, given the
potential for the ECB to beef up its asset-purchase program to prop
up markets.
"I think these markets remain very vulnerable, but we don't want
to fight the ECB in the near term," Mr. Loughney said.
The resignation of Greece's confrontational finance minister
Yanis Varoufakis on Monday was also helping to soothe markets, he
added.
In Asia, stocks in Hong Kong tumbled, while China's stabilized,
as Beijing took unprecedented steps to stem a three-week
selloff.
Some investors said that although the fallout seemed limited on
Monday, it was too early to dismiss the risks.
"Just because we're not seeing some kind of Armageddon in
markets doesn't mean that markets won't continue to be dragged
lower," said David Stubbs, global market strategist at J.P. Morgan
Asset Management, which manages $1.7 trillion.
He added that if the situation deteriorates and a disorderly
Greek exit becomes likely, then investors will have to start
"looking very carefully at deposit levels in Portuguese and Spanish
banks."
In commodity markets, Brent crude oil was 2.1% lower on the day
at $59.04 a barrel. Gold was flat at $1,164.20 a troy ounce.
Write to Tommy Stubbington at tommy.stubbington@wsj.com and
Josie Cox at josie.cox@wsj.com