SCOREBOARD: Greek shadow

Europe avoids recession but markets dip on continuing concerns over the future of Greece.

Global equities continued to sell off last night amidst sluggish European growth and the prospect of a new election in Greece. Growth-wise, the Europeans managed to avoid recession – but barely.

Growth was flat for the March quarter following a fall of 0.3 per cent in fourth quarter. Germany managed solid growth of 0.5 per cent, in France growth was flat at zero per cent while the Italians saw a solid drop of 0.8 per cent (the third quarter of negative growth in a row). For Spain, growth fell a more modest 0.3 per cent (the second quarter of negative growth and officially a recession). Certainly not great data but it wasn’t as bad as expected (a fall of 0.2 per cent). Either way it doesn’t change the view that Europe is experiencing a mild downturn now, but that growth will pick up over the course of the year.

Now as for Greece, they are heading back to the polls. My understanding is that the elections must occur within four weeks, so by mid-June (pundits suggest either June 10 or 17) and it's clear this is a referendum on euro membership more than anything. The major problem is that Greek citizens apparently think that austerity is an option, something that is unnecessary and being imposed by evil Germans. There seems to be very little understanding that austerity is unavoidable. To refute austerity is to take on more debt. But no one other than those evil Germans is prepared to lend them money to pay their wages and welfare at rates they can afford. So if they leave the euro, austerity will be worse. Unfortunately, the leader of the anti-austerity party is advocating that Greece stays in the euro, but reject austerity – i.e. they should be able to stay in the euro and borrow more money to continue to live beyond their means – and other people should foot the bill. The question that Greeks need to ask themselves as they head into this election is, who exactly will pay their bills? Austerity isn’t an option, it’s about getting the books in order – living within your means. Polls suggest this leftist anti-austerity party will come first in any new election but be unable to form a majority government.

In Europe, the news was ill-received, stocks in Greece fell another 3.6 per cent (over 20 per cent this last month) while in Spain, stocks were 1.6 per cent lower. The Dax was then off 0.8 per cent, the CaC 0.6 per cent and the FTSE 0.5 per cent. Euro then dropped 130 pips to sit at 1.2727, while investors stayed clear of Italian and Spanish bonds – the 10-year yield up 17 basis points and 12 basis points respectively to 6.34 per cent and 5.86 per cent.

Over in the US, stocks bounced around at the open, and the S&P500 was actually up 0.5 per cent at the high. That initial bid was fuelled by some not so bad data. Retail sales came in as expected, rising 0.1 per cent in April after a 0.7 per cent gain. 0.1 per cent is soft, but the broader context is one of strength. You’re looking at average sales growth of about 0.6 per cent over the last three months. In the business space, we saw the Empire manufacturing index surge to 17.09 from 6.56 in May, which is well above average (10) and then business sales rose 0.6 per cent (March) with inventories up 0.3 per cent.

All good news from the US, but the burden of Greece proved too great and the offer was soon on. At the close the S&P was down 0.6 per cent (1330) with all sectors lower but basic materials, and energy stocks hit hardest. That in turn was due to a further decent fall in the commodity space. WTI fell 1.8 per cent to $93.08, copper was down 1.8 per cent as well, while Gold fell about $8 to $1544 following a 0.9 per cent gain on the us dollar index. Other than that we saw the Dow off 0.5 per cent (12632), the Nasdaq fell 0.3 per cent (2893), while the SPI was 0.8 per cent lower (4241).

Over in the debt space, US treasuries ended up not doing much but yields followed equities higher initially and yield on the 10-year were up a few basis points to 1.85 at the high. As it is they ended little changed with the 10-year at 1.77 per cent, the 5-year at 0.73 per cent and the 2-year at 0.27 per cent. Aussie futures too weren’t much changed with the 3s at 97.4 and the 10s at 96.8.

Finally for the price action, the Australian dollar fell a further 40 pips to 0.9935, sterling was down over a big figure to 1.5993 while yen is at 81.89 from 79.8 as at 1630 (AEST).

Looking at the day ahead, we get Japanese machine orders out at 0950 AEST and then for Australia consumer confidence at 1030. The data is for May and while confidence has already slumped a lot lately, I don’t really have any sense where it will go from here. That 50 basis points cut from the RBA would normally be positive for confidence, but since the RBA commenced its easing cycle, confidence has actually deteriorated. I suspect that stems from the view that if they are cutting, then things must be bad. Wages follow at 1130 and while wage growth is accelerating it isn’t in danger territory yet. Tonight it’s worth watching out for eurozone inflation and trade figures and then from the UK, we see one of the greatest works of fiction that policy makers have ever produced – the BoE’s Inflation Report. Over in the US, housing starts data are released alongside industrial production figures. Apart from that we see mortgage delinquencies and foreclosures data and the FOMC minutes to the April 24-25 meeting.

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.

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