U.S. equity markets posted their biggest selloff of the year Monday amid the ongoing crisis in Greece as investors weigh the possibility of the nation's exit from the eurozone.
The Dow Jones Industrial Average plunged 350 points, or 1.95% to 17596. The S&P 500 shed 43.9 points, or 2.09% to 2057, while the Nasdaq Composite dropped 122 points, or 2.4% to 4958.
Both the Dow and S&P 500 slipped into negative territory year-to-date with Monday's selloff. All ten S&P 500 sectors were in the red led by a steep drop in banks and brokers.
Greece's financial system teetered on the brink of collapse, hurtling Monday toward a potential exit from the eurozone after weeks of negotiations between the nation and its creditors failed to yield any result.
Eurozone leaders met on Saturday in a last-ditch effort to hammer out a bailout deal, but Greek Prime Minister Alexis Tsipras refused to accept a deal that would have the nation cut pensions and raise taxes – a combination Tsipras has remained steadfast in believing would worsen the nation's financial distress. Rather than accepting the terms of the bailout, the Greek leader, in a surprise announcement, said the offer would e taken to the Greek people in a referendum on July 5.
On Sunday, Greece initiated capital controls on its banks in order to stem withdrawals in an effort to limit the strain on its financial system. Banks, and the nation's stock market, are set to remain closed throughout the week, while ATMs will reopen on Tuesday. In the meantime, a 60 euro cap per person per day was enacted on all cash withdrawals for the foreseeable future.
Failure by Greece to reach a deal with its creditors would result in a default on 1.6 billion euros in loans from the International Monetary Fund, a payment that comes due on Tuesday.
Peter Kenny, chief market strategist at ClearPool Group, said what's happened in Greece is "historic," and he put the odds on a Greek exit from the eurozone at "well above" 50%. But he said that's not the part market participants are necessarily reacting to right now.
"Everyone has come to terms with the demands from the ECB and the IMF as not achievable, so markets are well positioned to understand or expect Greece to exit the EU at some point," he said. "The real problem is what it will cost the ECB, specifically Germany. And secondarily, what does this mean for other periphery economies that are really joining this chorus of wanting to leave the EU? You can see this most easily in Spain. The EU can't afford a country the size of Spain – in terms of GDP – to leave. That's the real worry."
The news ricocheted across the eurozone on Monday sending the Euro Stoxx 50, an index that tracks large-cap stocks in the eurozone, plunging 4.2% to 2468. Meanwhile, the German DAX dropped 3.5% to 11083, the French CAC 40 slid 3.7% to 4889, and the FTSE 100 shed 1.97% to 6620.
In Asia, despite interest rate cuts and a lower reserve requirement ratio by the People's Bank of China, the Shanghai Composite index fell into bear-market territory, a 21.54% drop from a multi-year high of 5166 notched on June 12. The move lower comes amid concerns valuations were stretched after a sharp rally over the last 12 months. The Shanghai Composite tumbled 3% during the session, closing at 4053. Elsewhere in Asia, Hong Kong's Hang Seng index saw a 2.6% drop to 25966, while Japan's Nikkei 225 dropped 2.8% to 20109.
As a sign of the rising concerns on Wall Street, the VIX — a measure of implied volatility — surged 37% on Monday. That's the biggest gain since February, and the highest level in four-and-a-half months.
Meanwhile, traders also bid up safe-haven assets including 10-year Treasury bonds and German bonds. Investors also sought safety in the utilities sector, which declined the least.
Across the world in the U.S., it was a quiet day ahead on the economic-data front. Investors got the latest read on the housing market with the release of May pending home sales data. The National Association of Realtors reported contracts to buy previously-owned homes rose 0.9% for the month, below a 1.2% expected increase.
It's a July Fourth holiday-shortened week for U.S. traders, but a big economic release looms on the horizon at the end of the week: The June jobs report. It's an important read on the economy as it will be closely-watched by the Federal Reserve, which is expected to begin raising interest rates in September from historic lows. Analysts are expecting another strong month of strong job creation, with more than 250,000 new jobs and a drop in the unemployment rate to 5.4%.
Still, it's all about Greece — at least for now, according to BTIG Chief Strategist Dan Greenhaus.
"We'd like to tell you the nonfarm payroll report on Friday is important just as we'd like to remind people that earnings are starting to roll out with greater frequency. And both do matter. But this is likely to be a week of 'will they or wont they' as we watch every poll in Greece for indications. A 'yes' vote would almost surely result in a cabinet reshuffling if not Tsipras' outright resignation while a 'no' vote probably means Grexit," Greenhaus wrote in a note Sunday evening.
Kenny expects Greece to continue to weigh on U.S. equity markets at least through the middle part of next month.
"The Greek economy is a sieve. It's leaking everywhere. So even once banks have opened after July 6, we're going to see capital outflows accelerate. That story will dominate the U.S. equity narrative at least through then, and be a top-tier driver of markets for well past mid-July, and be a primary driver until then," he said.
Joy added that while the U.S. economy appears to be continually picking up steam, Greece could still play into the central bank's decision in the latter half of the year if it's still causing stress in the markets.
"The central bank will be mindful of stretch related to Greece and whether it requires some sort of ongoing liquidity provisions…it's something the Fed will be mindful of," he said. "No one expects to see higher rates until September, so there's still a long time to go, it's a tangential issue. But the Fed will keep an eye on the progression in negotiations in Greece."