Global Market Overview

March 22, 2010 10:33 pm

Overview: Doubts over Greek support unsettle investors

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Germany damps hopes on Athens bail-out

Nagging doubts over support measures for peripheral eurozone economies, and uncertainty about the outlook for global central bank policy made for an uneasy start to the week for financial markets.

Optimism that European Union governments would reach agreement over a financial stand-by facility to help Greece was dented at the weekend when Angela Merkel, Germany’s chancellor, insisted that no decision had been made on a bail-out package.

“Investors, in their eagerness to establish closure on Greek debt as a market theme, have moved too soon to discount a eurozone support package,” said Stephen Lewis, economist at Monument Securities.

He noted that José Manuel Barroso, president of the European Commission, and the German government could not agree even on whether the question of Greek aid would be a matter for discussion at an EU summit this week.

“While the issues raised by the crisis remain unresolved, the euro exchange rate is likely to remain on the defensive,” Mr Lewis said.

The euro touched a fresh three-week low against the dollar of $1.3461 on the currency markets and hit a 17-month trough against the Swiss franc.

Steve Barrow, currency strategist at Standard Bank, argued that the problem was not the size of Greece’s deficit but that the targets for deficit reduction were too onerous, coupled with the fact that Greece had limited room to aid economic recovery through lower interest rates or a weaker exchange rate.

“This implies to us that the euro’s problems won’t be over even if Greece gets a quick fix from the EU summit this week,” Mr Barrow said.

“A $1.25 rate for euro/dollar still beckons and it could come quite soon.”

Further evidence of the uncertainty surrounding Greece came as the country’s government bonds fell, while their German counterparts rose, pushing out the yield spread between the two by 13 basis points to 337bp, the widest for nearly a month. Credit default swaps on Greek government debt rose 24bp to 354bp, according to Markit data.

Meanwhile, the outlook for global interest rates remained an issue for investors following an unscheduled 25bp tightening at the end of last week by the Reserve Bank of India.

Divyang Shah, strategist at IFR Markets, said that after India’s surprise move, Brazil would come into focus this week, with the minutes of last week’s monetary policy committee meeting expected to signal a rate rise in April.

“The emerging market tightening theme is in full swing, but it is important to remember that while risk assets will react negatively, they will ultimately recover,” he said. “The rationale is that monetary policy tightening is coming on the back of 1) a desire to deal with domestic inflation risks; and 2) a view that the recovery in the domestic economy is sustainable.”

Emerging markets stocks came under pressure, with India’s BSE Sensex index down 1 per cent, its first fall in five days, although Shanghai inched up 0.2 per cent to a three-week high. Brazilian stocks recovered from an early slide.

The European Equity market was led lower by weakness in the banking sector, with the FTSE Eurofirst 300 easing 0.03 per cent to 1,065.16.

But Wall Street showed more resilience as healthcare stocks rose after sweeping reforms to the industry removed much of the uncertainty surrounding the sector.

By the close in New York, the S&P 500 was up 0.5 per cent. Japanese markets were closed for a holiday.

Following the modest gains for US stocks, the Vix index of equity volatility, a closely watched gauge of risk aversion, was down 0.1 per cent at 16.95.

US Government bonds ticked higher as uncertainty over Greece outweighed concerns about this week’s auctions of $118bn of new debt. The yield on the 10-year Treasury was down 3bp at 3.66 per cent.

Commodities had a choppy session, with oil recovering from a steep early fall to trade up 0.7 per cent to $81.25.

Gold briefly fell below $1,100 a troy ounce as the dollar firmed and investors were unsettled by the interest rate rise in India, a major bullion consumer.

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