Well we cannot say that we were not warned. Traders have been shorting the Euro and Greek debt for months now and a month or so ago European politicians were railing against the hedge funds etc for trying to ‘destabilise’ the markets. Unfortunately once again, the ‘speculators’ have been seen to be correct. One wonders if there will be any comeback on whoever was responsible for repeated misstatement (actually, let’s not beat around the bush…. outright lying) over the truthful levels of Greek debt. This has been the real cause of the disaster (UK politicians take note).
Yesterday’s comment had 2yr yields for Greece at 12pc; today it is at 15pc (possibly more), as the probabilities of a default increase. Make no bones about it, 15pc is ruinous in today’s markets. With Euroland inflation at under 3pc and virtually zero growth, there is no way on earth that Greece can repay (or even maintain) its debts at this rate. Unfortunately for the Northern States, they are now caught between a rock and a hard place; they can hardly let a member state default, but cannot find any certain legal way to back them up, let alone sell it to their respective electorates.
The euro is now back at the lows of last week (1.3190), which is a support of sorts, but in truth, any buying looks weak and the falls are still much faster than any rallies. This said, after big movements, markets have a habit of reversing on the next session. A long-winded way of saying that sitting on your hands is probably the best policy for the short-term!
The pound has caught a bit of the contagion as well, but it must be noted that the cross is still some way from the lows of recent months. Support at 1.5320 (mentioned in yesterday’s comment) held for most of the morning and into late afternoon, but was eventually broken and the reaction sell off was quite rapid. We are now 1.5230 as I write and longs are being pummelled. The woes of Greece can almost be mirrored in the UK and the only protection for Gilts is a floating the currency. Unfortunately where Greek debt has shot to 15pc, we can see the possibility of a similar reaction in the UK, except played out in the currency markets instead. No matter who wins the election, the spending cuts required to try to offset some of Gordon Brown’s unbelievable profligacy will be savage.
The European equity markets took the brunt of the pain yesterday, with the Dax and the FTSE falling further, in points terms, than the Dow (i.e. twice as far in value). The FTSE has been a tad lardy-arsed anyway against the US markets and this latest move has re-emphasised the lack of performance from the Senior UK index. The open this morning will very likely bring in the ‘bottom pickers’ and so a rally early in the session is quite possible. Not only this, but the 5565/5600 range is quite a solid support and resistance level both from January’s highs and then from March’s attempts to break lower. Once the initial buying surge is finished, we may then get a better picture as to the session’s direction. If we can hold above 5565 into the afternoon, then more confidence is likely to drift in, especially as the US markets have shown no real desire for lower prices (the falls in the Dow and S&P were really being affected by Europe and not the other way around).
As mentioned yesterday, when fear starts to stalk the markets Gold puts on its glad rags and yesterday was no different, with the yellow metal rising to a high of some $1172.
1160/62, which has proved such a good resistance level, now turns into support and traders will be watching to see if we can hold above here through today’s session. Unfortunately, you do get the impression that Gold only rallies whilst bad news is actually affecting the markets. When things go quiet it has a habit of drifting lower. In yesterday’s extreme market conditions, it might have been expected to actually move rather more than it did, which is worrying for the bulls. Like many markets at the moment, discretion is probably the better part of valour and a wait-and-see attitude may be called for.
The Brent/Nymex spread for the June contract continues to widen and is now at 325 cents. Crude speared higher in mid-afternoon yesterday, giving the spread trade the opportunity to spike to a dramatically wider level, which it failed to do. This will be giving comfort to those short of the spread, but it is still a dangerous play.