By Corrie Driebusch
U.S. stocks drifted lower Monday after Greeks resoundingly
rejected creditors' conditions for further financial aid.
The Dow Jones Industrial Average fell 102 points, or 0.6%, to
17628. Stocks spent midday trading around the flat line after
earlier being down by as much as 166 points. The S&P 500
dropped 15 points, or 0.7%, to 2062 and the Nasdaq Composite Index
declined 38 points, or 0.8%, at 4972.
More than 61% of Greek citizens voted "no" in Sunday's
referendum on the terms for a bailout that included pension cuts,
tax increases and other measures. The referendum was on whether to
accept austerity terms demanded by the country's creditors in
exchange for further aid. The "no" vote appeared to increase the
likelihood that Greece may eventually exit the eurozone.
Entering the weekend, many investors anticipated the result of
the Greek referendum would be a "yes" vote, which European leaders
had encouraged.
"What most banks and research shops were predicting was that the
measure would pass, Greece would take some of its tough medicine
and move on," said Erik Wytenus, global investment strategist at
J.P. Morgan Private Bank. "What's more surprising is the muted
market reaction."
Stocks and bonds in Europe fell on Monday, but the decline was
not as dramatic as some investors had expected. The Stoxx Europe
600 lost 1.2%, while Germany's DAX fell 1.5% and France's CAC-40
dropped 2%.
The euro initially tumbled before paring losses, recently
trading 0.5% lower against the dollar at $1.1062. Investors bought
U.S. Treasury bonds, viewed as haven assets, on Monday, pushing
down the yield on the 10-year note to 2.290% from 2.393% Thursday.
Bond yields fall as prices rise.
Greece's confrontational finance minister Yanis Varoufakis
resigned Monday, which many investors viewed as a positive sign for
negotiations with creditors. "The prospect for a deal is better now
that he's out," said Mr. Wytenus. "That's helping some of this
market reaction."
Separately, volatility in Asian markets spilled over to U.S.
markets. Stocks in Hong Kong tumbled, with the Hang Seng Index
notching its worst one-day performance since 2012, as Beijing took
steps to halt the recent selloff in stocks, including encouraging
stock buying with borrowed money.
"It's a dangerous combination today," said Jerry Braakman, chief
investment officer of First American Trust, which manages $1.1
billion, referring to the news out of Greece and China. To him, the
three-week selloff in Chinese stocks is more worrying than
developments in Europe.
"When you look at the proportion of revenue derived from China
for U.S. firms it can be 30%, so if that economy is struggling it
will be a much bigger story for the U.S. stock market than Greece,"
Mr. Braakman said. "Is it enough to derail the U.S. stock market?
Not necessarily. But I think it will increase volatility and
turmoil for the U.S. investor."
Worries about China's stock markets contributed to the price of
oil falling to a three-month low. Crude-oil futures fell 6.6% to
$53.17 a barrel.
Energy companies were the worst performing group in the S&P
500, down 1.3%. Among the worst performers were Transocean Ltd.,
off 4.4%, and Pioneer Natural Resources Co., off 3.3%.
The drama surrounding the Greek debt crisis has dominated U.S.
stock trading over the past several weeks. Two weeks ago, on June
22, stocks around the globe climbed as negotiations between Greece
and its international creditors appeared to be moving closer to a
positive conclusion. However, a week later, on June 29, stocks
tumbled as talks broke down. The Greek stock market was closed for
the week ahead of the referendum on Sunday, and there aren't plans
to reopen it until later this week at the earliest.
Analysts have said that even with the recent tumult in global
markets, they expect stocks to hold up better than they did in 2011
and 2012, when fears of a Greece bankruptcy swelled into worry
about the financial stability of other struggling European
economies, such as Spain and Portugal.
Unlike several years ago, little of Greece's government debt is
currently held by banks and private investors outside of the
country, which lessens the likelihood of a ripple effect of
losses.
After the developments over the weekend, analysts said the
probability that Greece eventually exits the eurozone is now much
higher. However, they said with Europe's improving economy, they
remain fairly upbeat on the region.
Mr. Wytenus said he was telling clients to keep calm, look
through all the geopolitical noise and buy European stocks.
"No matter what happens with Greek negotiations this week, the
economic situation on the ground is much more improved than in 2012
when people were concerned if Greece went out, it would create a
domino effect," he said. "Even if we were to see further weakness
throughout the course of the week, we'd continue to advocate for
clients to buy Europe."
Whether Greece comes to a new agreement with creditors or
whether the country ultimately leaves the eurozone, most investors
agree that it is unlikely to happen in the very near future.
"I still think cooler heads will prevail and some deal will
happen," said Jurrien Timmer, director of global macro at Fidelity
Investments. "But I think it could take several months for this to
work out."
Write to Corrie Driebusch at corrie.driebusch@wsj.com