Australian stocks open down after Greece fears spark global share rout

30 Jun 2015 | Author: | No comments yet »

Aust stocks open softer.

At 12.05pm (AEST), the benchmark S & P/ASX200 index was down 7.2 points, or 0.13 per cent, to 5,415.3, while the broader All Ordinaries index declined 7.7 points, or 0.14 per cent, to 5,408.9. The growing threat of Greece’s exit from the eurozone rattled financial markets Monday, as investors dumped stocks world-wide and moved to the safety of U.S. and German government bonds.Last year, with the future of the European monetary union on the line, Greece and its lenders haggled over whether milk could be considered “fresh” after remaining on the shelf for more than five days.

Overnight, Germany’s DAX 30 slumped 3.6 per cent, Paris’ CAC 40 dropped 3.7 per cent, while London’s FTSE 100 weakened 2 per cent as banks led declines. Europe never had the preconditions for a successful single currency — above all, the kind of fiscal and banking union that, for example, ensures that when a housing bubble in Florida bursts, Washington, D.C., automatically protects seniors against any threat to their medical care or their bank deposits. Rivin Securities CEO Scott Schuberg said that “while the ASX 200 had broken down through key buying support that represented previous June lows, the ASX 200 financials index remains above its June lows and could potentially rally as a sector on a technical basis”. “Should the current sell-off begin to exhaust itself and buyers enter the market to pick up discounts available on banks and insurers with high dividend yields, a strengthening ASX 200 financials index could easily begin to buoy the broader ASX 200 and act as a catalyst to help drive a recovery to reverse much of the damage done in the last three sessions,” he said.

The Dow Jones Industrial Average fell more than 350 points, or 2%, its biggest percentage decline since October, putting the blue-chip index into negative territory for the year. Greece’s interlocutors — known collectively as “the troika” and comprised of the International Monetary Fund (IMF), the European Commission, and the European Central Bank (ECB) — insisted that the five-day shelf life discouraged milk imports, thereby driving up prices for consumers and contributing to a less competitive economy. Tokyo’s Nikkei lifted at the open this morning, injecting some calm into the Australian market, but the sentiment shortly ended, with Chinese sharemarkets continuing their downward trajectory.

Leaving a currency union is, however, a harder and more frightening decision than never entering in the first place, and until now even the Continent’s most troubled economies have repeatedly stepped back from the brink. But that wasn’t the only time the troika demanded a policy change seemingly disconnected with the issue of debt repayment; in fact, Greece’s creditors have often demanded regulatory adjustments and labor market reforms that did not have an obvious bearing on the country’s financial stability. “They’ve put forward a whole series of demands for policy reforms that have nothing to do with budget issues and are really more focused on labor market deregulation,” said Joshua Mason, an economist at John Jay College of Criminal Justice in New York. The sudden breakdown in talks between Greece and European officials forced investors to confront the possibility Greece would default and leave the eurozone. In public statements regarding the negotiations, members of the troika have repeatedly emphasized the need for Greece to lower its debt and become financially sustainable.

In economic news today, the Housing Industry Association’s new home sales figures for May showed sales snapped a four-month stretch of increases, despite a strong rise in apartment sales. But they said they were wary of holding too many risky assets ahead of what is likely to be a turbulent week leading up to a planned Greek referendum Sunday. Proposed creditor reforms have included extending the maximum length of the work week to six days and “[decompressing] the wage distribution” for public sector workers — essentially, paying the lower-paid workers less so that the higher-paid workers can earn even more.

Meanwhile, ANZ-Roy Morgan’s weekly consumer confidence survey showed sentiment had hit an 18-month high, while the Reserve Bank’s financial aggregates showed an increase in the demand for private sector loans. Next week the country holds a referendum on whether to accept demands of the “troika” — the institutions representing creditor interests — for yet more austerity. In local economic news on Tuesday, Reserve Bank of Australia governor Glenn Stevens is due to speak at a function hosted by the Official Monetary and Financial Institutions Forum in London, while the RBA also releases its financial aggregates for May. Tensions reached a fever pitch last week when Greek Prime Minister Alexis Tsipras announced he would put the troika’s latest terms directly to the voters in a July 5 referendum. Adding to worries, Puerto Rico said it would be unable to pay all its debts. “People are getting nervous, as what seems like—all of a sudden, out of the blue—you have multiple hot spots,” said Ian Winer, director of equity trading at Wedbush Securities. “They’re just trying to protect their gains on the year and position themselves in the event that this becomes a more dramatic selloff.” The euro at first sank against the dollar Monday, but then gained as some investors bet the latest flare-up in the Greek crisis would prompt the U.S.

On Sunday night, Tsipras decided to effectively shut down the country’s banking system until after the referendum has taken place, an emergency measure intended to prevent devastating capital flight. An IMF spokesman said the organization would not comment on negotiations, but troika officials such as ECB executive board member Jörg Asmussen have previously suggested that “renewed competitiveness” in Greece would be necessary to resolve the crisis. “How can we reverse the dramatic increase in unemployment? Investors in past months have flocked to the dollar in anticipation of higher rates that would bolster returns, but the rally has lost steam amid patchy U.S. economic performance. Gyrations in currency markets prompted the Swiss National Bank to intervene to tamp down the value of the franc against the euro, the central bank’s chairman, Thomas Jordan, said Monday. “People are not panicking on this. It’s not a fire sale,” said Ryan Larson, head of U.S. equity trading for RBC Global Asset Management. “For the most part, the market is taking this fairly in stride.” Traders and analysts said stock markets are likely to hold up better than they did in 2011 and 2012, when anxiety ahead of Greece’s bailout snowballed into angst about the financial stability of bigger European economies, such as Spain and Italy.

But the troika is seeking a higher value-added tax (VAT), meaning that more of the tax revenue would come from Greek consumers instead of corporations. “If the objective is to raise revenue, why reject this particular tax move but insist on raising the value-added tax for the most vulnerable?” said Tcherneva. “There’s a logical inconsistency in that.” Mark Blyth, a professor of political economy at Brown University, was similarly critical of efforts to make Greece more competitive by reducing public investments and liberalizing the labor market. Blyth questioned the necessity of creating more labor flexibility in a country that already has 25 percent unemployment, and he mocked the idea that “what’s holding back foreign investors is the massive power of the Stalinist Greek unions.” Blyth, instead, argued for debt relief as the path out of crisis. Cases of successful austerity, in which countries rein in deficits without bringing on a depression, typically involve large currency devaluations that make their exports more competitive.

Bond yields on Greek debt surged Monday, but the rise was more modest for bonds from Italy, Spain and Portugal—highly indebted countries that in past years were seen as vulnerable to spillover from Greece. Some empirical studies of the Greek economy, including one conducted by the IMF’s own research department, have suggested that sharp budget cuts slow down economic growth and further limit the government’s ability to cover its debts. The stability of the world is in a better place than it was three or four years ago,” said Scott Wren, senior global equity strategist at Wells Fargo Investment Institute.

The problem has always been the risk of financial chaos, of a banking system disrupted by panicked withdrawals and of business hobbled by banking troubles and uncertainty over the legal status of debts. That’s why successive Greek governments have acceded to austerity demands, and why even Syriza, the ruling leftist coalition, accepted the austerity that has already been imposed. A number of investors saw the selloff as a good chance to buy European stocks, reasoning that the turmoil in Greece is unlikely to hold back a broader economic recovery in the region. “Over our six-month investment horizon, ECB action should mitigate contagion effects to other markets or economies in case of a Greek exit,” said Mark Haefele, chief investment officer at UBS Wealth Management. If Greek voters reject the creditors’ demands in Sunday’s referendum, investors’ faith that Greece won’t trigger a financial crisis will be tested anew.

In that scenario, stock markets in the euro area could fall by about 15% on “uncertainty and fear,” said Eric Chaney, head of investment strategy at AXA Investment AXAHY -4.99 % Managers, which oversees €689 billion of assets. A reaction Monday that some might see as mild means there is room for further declines, said Ewout van Schaick, who oversees more than €20 billion ($22.6 billion) at NN Investment Partners.

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