Following a week that saw investors blinkered by the prospect of more stimulus from the Federal Reserve and solid gains for equities, another little dose of reality is hitting markets this morning.
Headlines are dominated once again by problems in peripheral Europe as the vicious circle of handouts and bailouts continues. National governments are being thrown money by Europe and the IMF who are in turn having to throw it at their autonomous regions and banks. But it’s the move by the IMF that’s the significant one as rumours are doing the rounds that they are going to cut off their aid to Greece. This realisation that you are probably better off simply putting the money on a large bonfire as opposed to giving it to the Greek government is a signal that there is little faith in country being able to meet its debt target by 2020. With the IMF saying enough is enough the EU is going to have to fill the hole at a time when its resources are already being stretched to the limit by Spain requesting €100 billion only recently. Needless to say the yields on the country’s ten year bond spiked to a record high causing a sell off of all risk assets and in particular a pummeling for the single currency.
A major worry now of course is whether Italy will be next as its bond yields continue to slide down their slippery slope. This is such an unknown as far as the amount of funds the country would need in respect of a bailout as its crippling debts and the size of its economy dwarf those of the periphery. Italy is a G6 country with liabilities that stretch across the globe. There’s so many parts of the financial system that it touches that the thought of a bailout for them is very scary indeed and at worst a default then we’re almost in apocalyptict territory. Let’s hope it doesn’t come to that!
Asian stocks have taken a bit of a hit overnight following the poor performance of US indices on Friday and the newsflow over the week end. This has filtered through to European trade this morning with the FTSE commencing the week some 50 points lower dipping below the 5600 level. Only half a trading session before the index was testing the resistance levels around 5700 looking like it was about to stage a late summer rally but the situation in Europe still dominates and this shows how investor can turn on a sixpence. With politicians on holiday and no up and coming summits to speak of it’s little wonder that the consensus of a “Grexit” either later this year or early next year is becoming more the norm.
The euro plunged 119 pips versus the greenback on Friday, reaching multi-year lows before closing at 1.2154 after Valencia’s regional government in Spain asked for financial help. At the same time, the yields on Spain’s 10 year bonds rose to a record 7.24%. As if that was not enough to scare investors, the European Central Bank announced it will reject Greek bonds as collateral for the time being. All in all the single currency is very much out of favour and that negative sentiment is pushing EUR/USD lower to 1.2090 at the time of writing.
Last week’s rally in crude oil, fuelled by geopolitical worries about Iran and hopes of QE3 came to an end on Friday as fresh worries on Europe took its toll on the energy sector. A stronger US dollar also put downward pressure on WTI crude prices which declined 78 cents to $91.44. Some early signs this morning indicate those fears are not over yet as the downward pressure seems to be continuing.
The precious metal continued to move sideways in the last two weeks largely within $1560 - $1590 range. Along with the speculation of another stimulus package, support for gold was provided by inflation worries on higher grain prices following drought in the US. On the other hand, a higher dollar is keeping some of the buyers on the sidelines.