Welcome to reality, once again.
All those investors in Asia, Australia, Europe and the US who reckoned the world economy was out of the woods and the financial system had recovered, had better recast those dreams.
Global markets fell for a second day and a third in five trading days on fears about Greece, the euro and debt.
Three deaths in Athens overnight in a fire caused by a petrol bomb, has worsened those fears.
And tonight’s British election could very well see the current instability extended if there is an inconclusive result.
Currency markets will get nervy, and watch the US dollar rise as safe havens are sought. It did that last night as US bond yields fell sharply.
The Euro hit a new 14 month low and dipped under $US1.28. The Aussie dollar traded around 90.54 US cents.
And don’t be surprised to see a continuing weakening in commodity prices.
Copper and other metals, oil all fell again overnight.
Oil is now under $US80 a barrel, down 10% since Monday’s 18 month high.
US markets followed Europe down for a second day.
The falls were not as big as Tuesday, but they reflected concern about Portugal, Spain and squabbling in Germany about aiding Greece.
Our market will be lower after the US fall.
And the European Central Bank’s monthly monetary policy meeting is tonight, in Lisbon of all places (It rotates).
Rates won’t change from the current 1%, nor will anything else.
The ECB has already handed out a gift to Greece in dropping quality levels for dealing in Greek debt to make sure the country’s banks don’t go bust. It’s a precedent that many in the markets are still trying to believe.
So the words of ECB head Jean Claude Trichet will be subjected to greater scrutiny tonight by markets around the world.
The ECB seems to be saying that it is standing behind Europe in a way no one thought it would.
Greek banks must be in a really bad state.
Economies around the world are definitely better than a year ago, those green shoots of 2009 are now lawns, bushes and saplings around the world, but still vulnerable to a loss of confidence, or a re-eruption of financial uncertainty.
Worries about Greece (wasn’t that sorted on Monday?) and China (an apparent slowing in manufacturing isn’t the real worry from China, it’s the property boom), overshadowed more good news on the US economy (factory production the best for six years, an improvement in lending confidence among more banks).
So markets are wobbly again.
For how long, no one knows, but it is again a reminder than all this talk of risk aversion vanishing and recovery and how things are back to levels before the crunch started in mid-2007, are all ephemera.
Greece is Europe’s subprime crisis, either wholly (in that it will be contained) or the start and other sovereign debt will be questioned and sold down.
What we have to remember is that the longer and noisier this problem in Europe gets, the greater the chance the tentative recovery ends and the continent slides back into recession.
The continuing uncertainty comes at a difficult time for the UK as well.
Tonight’s national election could see a clear win to one party, but the best result is for more confusion and a weak minority government that’s unable to cut and hack into spending to reduce the deficit and start controlling debt levels.
If that happens (and is not corrected by a second election with a clear winner), the Greek problems could spread to envelope UK debt.
In Australia the worries over the mining super tax (which is nowhere near ready) morphed into fears about interest rates, and then a touch of relief that rates might not rise again, and they morphed again into a continuation of the fears from offshore Greece and China (which strangely doesn’t bother many Australians at the moment).
Not even a record $2.8 billion interim net profit from Westpac yesterday (thanks to buying NSW competitor St George) and a sharp fall in bad debt provisions could help local sentiment.
But there was a local easing in late trading as the gullible investors in resource projects realised they had oversold.
Greece won’t hurt us directly, but the knock-on effect from hurting Europe could be very, very significant.
There’s a summit of EU leaders to come and the Greek bailout has to get through the German parliament (and then there’s the big regional poll in Germany on Sunday which could undo everything if Angela Merkel’s conservative government does badly, as expected).
But the really worrying development was the nasty rumour spread by someone that Spain had gone to the IMF to negotiate a loan or loans. Insanity said the government.
Other stories said Fitch was about to cut Spain’s AAA stable rating. No, said Fitch, its still AAA stable outlook, but no one listened.
Moody’s didn’t help sentiment when it threatened to downgrade Portugal later in the year.
Out in the shadow world of hedge funds and other investors someone was short Spain (bonds, shares, swaps, etc) and trying to make a killing, and probably got a nice earner on the day.
$280 billion euros was the suggested sum, gob smacking and it did its work as down went Spanish shares by more than 5%, and Portugal, which is said to be the next Greece, saw its shares plunge and down went all the other markets.
Fear has returned.
