Australia's lopsided stock market wobble

Since the start of the month global stock markets have got the wobbles again and it's quite obvious why.

In the lead-up to the French and Greek elections a week and a half ago it was evident that the anti-austerity forces were likely to prevail, which is what transpired.

The French outcome, with Socialist Franois Hollande defeating conservative incumbent Nicolas Sarkozy, was less disconcerting than the very messy and indecisive Greek election, where the radical left emerged as a destabilising force of sufficient magnitude to send Greece back into another election that is expected to produce an even bigger anti-austerity protest.

That election has left Greece on the brink of a forced departure from the eurozone and has raised the prospect of contagion within the other weak southern European economies – Portugal, Spain and Italy – that could ignite another full-blown financial crisis.

The new and threatening instability in Europe has caused Italian and Spanish bond yields to blow out and, with Spain trying to embark on a plan to restructure and recapitalise its reeling banking system, raised the spectre of bank collapses and runs in southern Europe. Even if the eurozone can somehow weather the new crisis, it doesn't auger well for its contribution to global economic growth.

The new strain of fear coursing through global markets as a result of the fresh concerns about the stability of Europe has impacted markets and is reflected in the usual flight to the perceived safe haven of US Treasuries that has been a feature of the post-2008 markets whenever the risk in the global system is seen to have risen.

Again, as usual, that has had an impact on the Australian dollar, forcing it below parity again as the funds chasing the higher real returns available in Australian bonds, and other riskier asset classes, have been pulled out.

There is, moreover, another factor that has emerged since the start of the month that has added to the sense of impending crisis generated by Europe. Last month the economic indicators out of China appeared to be showing that the planned slowdown in its economy had bottomed in March.

Last week, however, the statistics for April showed China had slowed almost to a halt, with industrial production, retail sales, investment, imports, exports and bank lending all slowing significantly. The combination of the weak world economy and markets for its exports and its own attempts to deflate the property-centric boom/bubble of activity last year is having a highly contractionary impact.

The eurozone crisis and China's slowdown have implications for this market at several levels.

Lower world economic growth and slower growth in China in particular are obviously not positive developments for a resources-oriented economy. Given the experience of the original global financial crisis, the prospect of another financial crisis and the freezing of bank funding markets is not positive either.

While our banks have reduced their reliance on offshore wholesale markets they are still raising significant proportions of their funding offshore.

Since the start of this month the US stock market is down about 5.3 per cent and the Australian market about six per cent.

Apart from the flight to safety element, the nature of our stock market – dominated by resource companies and banks; the two major miners, BHP and Rio Tinto, and four major banks in particular – is magnifying the impact of the events offshore.

Those six companies alone make up nearly 40 per cent of the ASX 200 index, so issues that relate particularly to resources and banks are going to have an exaggerated effect on our stock market and currency.

The stock market declines aren't just related to macro factors but to their real world effects.

Marius Kloppers was speaking about a new reality for resource companies and their investors overnight when he said cash flows for miners this year would be lower than they were last year and made it clear BHP Billiton would now be more conservative and measured in approving new projects. All the big miners are on that same page.

The recent round of bank interim reporting also showed that, with minimal growth in demand for credit, funding pressures and steadily increasing costs associated with the tougher prudential regime they are being subjected to, the major banks now look more like utilities focused on growing earnings by reducing costs rather than the growth businesses they were pre-crisis.

The only good news to flow from events of the past fortnight has been the depreciation of the Australian dollar. That weakening of the currency, the Reserve Bank's rate cut and the Gillard government's latest cash splash might reduce at least a little of the pressure on the non-resource side of the economy, at least for the moment.

If Greece doesn't exit the eurozone and implode, flooding its neighbours with contagion, and China's efforts to inject some modest stimulus back into its economy are successful, of course, the relief will be momentary.