A savage night for markets and obviously it’s all about Greece. Nothing has been sorted yet, but markets are very nervous about Greece exiting the eurozone. It would be very surprising if they actually did that given it is the worst possible outcome and would severely impoverish the Greek people – as I have already pointed out over the last couple of years – and something their leaders, even on the radical left, must know if they have even an ounce of intelligence. But it wouldn’t be the first time a seriously stupid decision was made. It doesn’t help that you have some economists running around talking about what a wonderful thing it would be for the Greeks if they did leave – because then they could devalue their currency, and if they did that, Greece would be a veritable utopia.
Greek stocks were smashed falling 4.6 per cent for the session and they are down almost 20 per cent for the month. For the larger economies, moves weren’t quite as bad, but bad they still were. The Dax, for instance, was down 1.9 per cent, the CAC fell 2.2 per cent while the FTSE was down 2 per cent or close enough and obviously within that, financials took a savage blow. But you know the broader pattern by now as we’ve dealt with it enough times. Risk off and only questions over magnitude remain. How bad was the contagion? As I’ve discussed previously this is the only real question for global investors as Greece by itself doesn’t matter – 0.5 per cent of the globe. Added to that, contagion, in theory at least shouldn’t even be occurring – it’s not a rational response, but it is self–fulfilling. With that in mind, Spanish bonds shot 23 basis points higher to 6.3 per cent which isn’t too far off the high of November 2011 – 6.78 per cent. Italian bonds for their part rose 19 basis points and sit at about 5.7 per cent, quite a bit lower than their high of 7.5 per cent last year. While we’re on that, the ECB reported that they didn’t purchase any bonds over the last week – which is the ninth consecutive week they’ve been out of the market. Even when they’re in the market they’re not buying much. Otherwise the euro lost 70 pips, or near enough, to sit at 1.2827 – the lowest since mid-January.
Across the Atlantic, Wall Street's session was almost as bad and soon after the open, the S&P500 was already off 1.1 per cent. In the next few hours of trading gains were made and those losses erased, but then the offer was back on and the index closed 1.1 per cent lower (1338). Financials, energy and basic materials were the key underperformers and obviously that’s because commodities had a fairly atrocious session. Copper for instance was down 3.6 per cent, gold fell $24 to $1556 and in the crude space WTI fell 2.1 per cent ($94) while Brent was 1.1 per cent lower ($111). Elsewhere the Dow fell almost 1 per cent (12695), the Nasdaq fell 1.1 per cent (2902), while the Aussie SPI was 0.7 per cent lower (4265).
Treasuries then rallied hard, in fact most major bonds around the world did and we are talking record lows or near record low for many of the major yields. Specifically for the US the 10-year yields fell about 6 basis points to a low yield of 1.76 per cent which is only 2 basis points higher than the low in September last year. The 5-year yield is at 0.71 per cent and I think is a record low (equal to January) and almost 3 basis points lower overnight. The 2-year sits at 0.26 per cent – little changed. Aussie futures followed the global trend and shot 6 to 7 ticks higher on the 3s (97.45) and 10s (96.835). Otherwise the Australian dollar is comfortably below parity at 0.9961 down about 42 pips from 1630 AEST.
Bits and piece otherwise. As if on cue, and after the close, a ratings agency downgraded 26 Italian banks just to add to the sense of drama. Then in terms of the data, European industrial production fell 0.3 per cent in March after a 0.5 per cent rise, while German wholesale prices were up 0.5 per cent in April to be 2.4 per cent higher annually.
Looking at the day ahead we get the RBA’s minutes and also car sales (both at 1130 AEST). The RBA minutes have very little to offer given recent economic data show there is no credible argument to be made that the economy is weakening. Tonight, look out for German GDP (a rise of 0.1 per cent expected), eurozone GDP (a fall of 0.25 expected), German CPI, the German ZEW survey and then in the US we get retail sales, CPI and the Empire manufacturing survey.
Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.
Follow @AdamCarrEcon on Twitter.
SCOREBOARD: Greek gravity
Greek markets took another big fall to be down 20 per cent for the month, while European and US markets also saw a dip.
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