Spectre of Greek Default Spooks Global Markets
Traders headed for the exits this week as the sell-down continued. Investors were cautious as data remained soft in the U.S. and in Asia, and the spectre of a debt restructure/default in Greece is dominating investor sentiment.
Globally markets have continued to be plagued with concerns over the sovereign debt issues in Europe, particularly in Greece. Asian markets have also been dragged lower by reports showing that Japan is in a recession, that Chinese growth is slowing near-term, and by an increase in capital reserve requirements hitting the Asian banks.
Commodities prices have also been under pressure this week due to concerns over the faltering global economy.
The ASX All Ordinaries and the S&P/ASX 200 have experienced selling again this week. The Aussie market continues to test the key support levels of its March lows and is trading at the lower end of its falling channel formation. It is crucial that support holds at these levels, otherwise we could see the market test 4200 near-term.
Australian shares are starting to show some value but investors are unlikely to rush to open new positions until the situation in Greece is resolved. Miners have suffered due to concerns about economic growth near-term and energy stocks have been weak as crude oil tests $US95 per barrel, but banks are starting to look good on a yield basis.
The focus is on Greece at the moment but there are also domestic headwinds continuing to confront investors, including the poor GDP figures, slowing jobs data, the mining tax and the possible carbon tax, all of which are weighing on sentiment.
U.S. stock markets are trading lower for a seventh week. Financials have led the fall, but material and energy stocks also fell as economic worries continued to weigh on sentiment, dragging the indices down again.
Investors continue to be wary of risk as the Greek debt crisis remains unresolved. A Greek default would be fractious to the European Economic Union, with global ramifications on financial systems, leading to massive losses for creditors and impacting on the global economic recovery. Defensive sectors such as utilities and consumer staples components provided some support.
Overnight, U.S. stock markets ended mixed after a late session rally. The Dow Jones Index ended higher, after recovering from 3-month lows, while the S&P 500 and the Nasdaq again closed around their lows for the year. The U.S. dollar jumped higher in a “flight to safety” which put pressure on commodities prices.
The Dow Jones closed up 0.5% at 11,961, the S&P 500 index closed up 0.2% at 1,265, the Nasdaq ended down -0.3% at 2,624, and the smaller cap Russell 2000 was up 0.3%.
European stocks have continued to weaken this week as worries about Greek finances and the health of the U.S. economy again weighed on sentiment.
The Greek ASE index slumped as the country was practically shut down on Wednesday by a 24-hour general strike to protest new austerity measures, and demonstrations in Athens turned violent. Greek bonds were trashed, sending yields to their highest levels since the inception of the euro, as euro-zone officials failed to make progress on discussions about aid to Greece.
Elsewhere the Irish budget minister warned of more budget cuts, and the European Central Bank warned that contagion from the euro-zone’s debt crisis remains the top risk to financial stability in the EU bloc, while reiterating their opposition to a Greek debt restructure.
The S&P Ratings Agency cut Greece’s sovereign rating to junk territory, cutting it to CCC from B, the lowest in the world, rather focusing on the likelihood that euro-zone officials will reach a deal to help the nation avoid a default.
Investors continued selling as the week unfolded, even as the European Union and the International Monetary Fund said that the next tranche of Greek aid is likely to be approved at a meeting of euro-zone finance ministers on Sunday. A second bailout package for Greece and a decision on the nature of private-sector involvement is scheduled for early July.
Banks were under pressure again across the region with the National Bank of Greece and Alpha Bank each down more than 4%, while major French banks were down after being put on review for possible downgrade by Moody’s Investors Service, because of their exposure to Greek debt.
Overnight in London the FTSE 100 index was down -0.8% at 5,699, the German DAX was down -0.1% at 7,110, while in France the CAC was down -0.4% at 3,792.
Asian share markets have traded lower again this week, with Hong Kong and Australian markets hitting multi-month lows and trading at their lows for the year, after a sharp sell-off in the U.S. mid-week. In Hong Kong the market has been under pressure as an announcement of higher bank-reserve requirements by China hit Hong Kong-listed financials.
Persistent news of a possible Greek default has also unnerved investors globally. In China the Shanghai Composite has fallen, as banks sold-off after the People’s Bank of China announced a half a percentage point increase to the reserve requirement ratio. This is China’s sixth increase this year, and will take effect 20 June, bringing the ratio for most large lenders to 21.5%. Miners have also weighed due to the prospect of slower global growth.
Overnight in China the SSE Composite was down -1.2% at 2,664, while in Hong Kong the Hang Seng Index was down -1.5% at 21,910 and in Japan the Nikkei 225 Index was down -1.4% at 9,411. The South Korean KOSPI was down -1.7% for the session, while the Indian market was down -0.5%.
The Australian share market has had a another sell-off this week and markets look set to remain subdued as we head into the end of the financial year. As the week progressed investors continued to choose caution, as fears of Greek debt contagion seeped into investor psyche.
The S&P/ASX 200 index is testing its March lows and we may see consolidation near-term as the index has pushed towards the lower end trading range of its falling channel. The headwinds remain with a strong Aussie dollar, slow jobs and retail sales numbers and the proposed carbon and mining resource taxes, plus the end-of-financial year clean-out all weighing on sentiment.
The S&P/ASX 200 is currently trading at 4510 and is trying to find support around these levels. Key levels for the index next week will be 4600 and 4400.
By Michael Hevern
Head of Research