The global market is on tenterhooks as it strains to explain September's morbid performance and prepare for a possible Greek default.
DON'T look now but we're in October, which is the sharemarket's traditional month of fasting. Still, for all October's bad press - having hosted the eight worst one-day falls, which is a bit spooky really since nobody has yet come up with the explanation for it - it's September that's more predictably bad.
Again, who'd know why?
At least October can boast the five best single days compared with September's one. Anyway, September has done it again. The sharemarket has slunk into a bear pit, having fallen more than 20 per cent in six months.
There goes the super again. At least this time the share slump has nothing to do with the month or the stars. No, to quote a phrase: it's the economy, stupid.
The economies of Europe, the US and China are all slowing. What's really freaking the markets is that Europe, a major customer for both the US and China, is hurtling towards a full-blown recession.
The more Euro-zone ministers insist the Greek debt tragedy is under control, the less the market believes them, with good reason.
There are endless flaws in the most recent solution to prevent a Greek default, which is to write off half its debt and re-finance the other half with new loans from capital mostly provided by Germany.
Top of the list is that Germany can't afford it - and what better example of throwing good money after bad than dismantling the economic powerhouse of Europe for the sake of a basket case? And I don't mean Greece - well, not entirely - but the European banks which bought worthless bonds from it.
As it is, Germany has a debt problem of its own, something, touch wood, the markets have overlooked.
Spain, in the firing line after Greece and Portugal, has a debt-to-GDP ratio of 64 per cent, well below Germany's 80 per cent. I won't say anything if you don't.
Oops, could be too late.
The cost of insuring German bonds, a measure of money market nervousness, has soared to Lehman Brothers levels.
Countries do default but this would be the first time one could take the banking system of a continent down with it.
You'd think Russia's default in 1998 should make Greece's a piece of baklava but those victims were Russian households with bonds and the huge American hedge fund Long-Term Capital Management, which collapsed.
With Greece, some of the biggest banks in Europe would be hit hard and would have to raise large slabs of capital to survive.
They wouldn't be able to lend and, indeed, would have to call in several loans to shore up their books if panic set in.
With no lending, Europe would slump into a prolonged recession. No wonder the potential impact of this on commodity prices has the market hyperventilating.
Until the European banks are re-capitalised, all the European Union is doing is postponing the inevitable for no benefit but great cost, which can't help confidence when its taxpayers know they'll have to pick up the tab.
Although our Reserve Bank must be watching Europe with disbelief, don't expect a rate cut at Tuesday's board meeting.
Rather than make a piddling cut that won't achieve anything, it'll hold its ammunition for when it's really needed.
Frequently Asked Questions about this Article…
Why did global sharemarkets fall so sharply in September and enter a bear market?
September’s poor performance reflected a broader economic slowdown rather than calendar superstition. The article highlights slowing growth in Europe, the US and China, plus growing fears of a Greek default and a possible European recession — factors that pushed markets down more than 20% over six months, a common definition of a bear market.
What does it mean that the sharemarket has 'slunk into a bear pit'?
The article uses that phrase to describe a market that has fallen more than 20% in six months. A bear market signals deepening investor pessimism tied in this case to economic weakness in major regions and heightened sovereign‑debt concerns.
How could a Greek default hurt European banks and global markets?
According to the article, a Greek default would hit some of Europe’s biggest banks hard because they hold Greek bonds. Those banks might need to raise large amounts of capital, curtail lending or call in loans — actions that could tip Europe into a prolonged recession and pressure commodity prices and global markets.
What solution is being proposed to avoid a Greek default and why do markets doubt it?
The article describes a proposed fix to write off half of Greece’s debt and refinance the other half with new loans largely supplied by Germany. Markets find this solution flawed because it shifts big costs to Germany and taxpayers, risks throwing good money after bad, and doesn’t immediately recapitalise banks that bought Greek bonds.
Is Germany’s debt situation a concern for investors right now?
Yes. The article notes Germany has its own debt challenges (around an 80% debt‑to‑GDP ratio cited) and that the cost of insuring German bonds has jumped to levels compared with the run‑up to Lehman Brothers, signaling elevated market nervousness about German sovereign risk.
How might the European debt crisis affect commodity prices and Australia’s market outlook?
The article says markets are 'hyperventilating' about the potential hit to commodity prices if Europe slumps — weaker European demand would weigh on commodities. It also suggests Australian authorities are watching Europe closely, given the global ripple effects of a European slowdown.
Will the Reserve Bank (RBA) cut interest rates because of the European crisis?
The article suggests the RBA is watching Europe with concern but does not expect a rate cut at the immediate board meeting. Instead, it says the bank is likely to 'hold its ammunition' — keeping policy firepower for when a cut would be more effective.
What market signals should everyday investors monitor during this period of volatility?
Based on the article, investors should watch developments around Greece and other sovereign debt issues, signs of European bank recapitalisation or stress, the cost of insuring sovereign bonds (a measure of market nervousness), global growth indicators for Europe/US/China, and commodity‑price trends — all of which are key drivers of current market volatility.
Call 1300 880 160
Start a chat
Schedule a call
