SCOREBOARD: Grexit glitch

European markets tumbled heavily as investors struggled to make up their minds on what to expect from Greece.

"The Greeks must be rational and protect themselves from decisions that they will live to regret. Leaving the euro is not the answer to their problems.” So said former ECB member Lorenzo Bini Smaghi and he’s right. Even the former Greek prime minister, Lucas Papademos, who said that the Greeks may start thinking about an exit, said a Grexit was still unlikely. If only the world was rational, eh?

We’re in the usual yo-yo phase at the moment – the news-flow dictating feelings of elation that Greece won’t leave, and fear that a collapse is imminent. Last night it was fear that a collapse is imminent – well in Europe at least and the Dax fell 2.3 per cent, the Cac fell 2.6 per cent while the FTSE fell 2.5 per cent. As for the euro, it fell another 70 pips or so and now sits at 1.2570, down from a 2012 peak of 1.35 and just a bit above the decade average. Spanish and Italian bond yields of course rose – 9 basis points for the Italian 10-year (5.67 per cent) and 13 basis points for the Spanish (6.2 per cent).

Over on Wall Street, stocks initially followed suit and were belted. At the low the S&P500 fell 1.5 per cent but around mid-session it all turned around. Elation. What actually drove it I have no idea. There was no new news flow or data. Well there was data, new home sales and they rose a stronger-than-expected 3.3 per cent in April (2.1 per cent expected). Still only about 40 per cent or so of the average, but that recovery is there. Oh, and house prices rose in the March quarter as well – 0.6 per cent according to the FHFA. Thing is, all that data came out as equities were in freefall. Whatever was driving it, in the ensuing three hours or so of trade, the S&P put on 22 points to close at 1318 or 0.2 per cent higher. Basic materials, industrials and consumer services led the index higher, with utilities, health care and telecommunications weighing most heavy. There was no such luck for the Dow which ended lower, just, 0.05 per cent (12496), while the Nasdaq rose 0.4 per cent (2850). The SPI too rising 0.4 per cent (4082).

That’s a pretty impressive effort for US equities all considered, given that everyone is piling money into bonds – and getting nothing in return! Germany and the US managed to sell off some bonds at record low yields. The Germans got that 2-year note out that I referred to yesterday, and yes, with a zero coupon and at yield basically at zero per cent (0.07 per cent). The thing is, even with such attractive terms demand was strong. It was the same for the US Treasury’s $35 billion 5-year auction which went out at a record low yield of 0.748 per cent. In the secondary market the 10-year yield fell about 3 basis points or so to 1.73 per cent, the 5-year was down a bit over 2 basis points to 0.7329 per cent while the 2-year did little and sits at 0.289 per cent. Aussie futures then rose three to four ticks with the 3s at 97.65 and the 10s at 96.93.

Commodity markets then suffered a withdrawal of funds, especially copper and crude. Crude dropped off 2.1 per cent on Brent ($106) and WTI fell 1.5 per cent ($90.5). Copper for its part fell 2.6 per cent so the fact that the Australian dollar was only 40 pips lower overnight is quite something (0.9759). Elsewhere we saw that gold was little changed at $1561, although it did hit a low of $1533 before rebounding around the same time as US equities.

Bits and pieces otherwise. UK retail sales dropped 1 per cent in April after a 1.5 per cent gain the month prior. While the BoE minutes reveal that the decision not to print was a close one – of course it was. Both the Fed and the BoE are likely to print again is the safest guess at this stage.

Looking at the day ahead, there is Kiwi trade data this morning and then the flash estimate of China’s PMI at 1230 AEST. It’s not a very good data piece at all but it does, inexplicably, move markets at times. Tonight we get the first quarter German and UK GDP breakdown, the German IFO survey and European PMIs. In the US, we get durable goods orders and initial jobless claims.

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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