WORLD STOCKS slid, the euro shed more than 1 per cent and oil prices dived yesterday as a new round of fear gripped markets that Greece may default on its debt and trigger economic fallout that would cascade throughout the euro zone and possibly beyond.
Markets were unimpressed by the lack of resolution from a weekend meeting of European finance ministers, where US treasury secretary Tim Geithner received little support for his call to beef up the EU’s bailout fund.
“As last Monday, global risk markets are in retreat – the reason in both instances is the same,” said Stephen Lewis of Monument Securities. “Investors put their faith in global leaders to come up with measures to tackle debt problems, only to see their hopes of constructive action dashed.”
Greek prime minister George Papandreou cancelled a planned trip to the US as a decision loomed over whether Greece would receive the next tranche of international rescue funds.
Renewed tensions were indicated by Greek debt yields rising for the first time since last Tuesday. This prompted investors to seek refuge in the US dollar and treasuries. But gold, which often benefits from safe-haven flows, retreated more than $30 an ounce on the stronger dollar.
World stocks as measured by the MSCI world equity index fell 1.9 per cent after posting the biggest weekly gain since early July last week.
“People went into the weekend in hopes that Geithner’s visit to Europe would bring more clarity but no positive move came out and we are back with dealing with European problems,” said Karl Mills, president of Jurika, Mills Keifer Investment Partners, in Oakland, California.
Investors, he said, were “not only over-bought but we were over-hoped”.
On Wall Street, US stocks fell for the first time in six sessions. The Dow Jones industrial average was down 208.47 points, or 1.81 per cent, at 11,300.62. The Standard Poor’s 500 Index was down 20.91 points, or 1.72 per cent, at 1,195.10. The Nasdaq Composite Index was down 27.05 points, or 1.03 per cent, at 2,595.26.
European stocks ended 2.3 per cent lower at 916.07. The Stoxx Europe 600 Banks index fell 3.4 per cent to feature among the worst performers. Emerging stocks dropped 3 per cent.
“There will be additional volatility in the global financial markets heading into the end of the month as the pressure to get Greece and others to enact their reforms will be white-hot intense,” said Andrew Busch, global currency strategist at BMO Capital Markets in Chicago.
The International Monetary Fund, European Central Bank and European Union, known as the troika, “will threaten to use the nuclear option of not providing the payment that allows Greece to avoid default”, Mr Busch added.
Finance ministers of the Bric emerging economies – Brazil, Russia, India and China – will meet this week to discuss support for the euro zone. A Brazilian newspaper said yesterday that the five Bric nations, which also includes South Africa, have already bought debt through the European Financial Stability Facility and could buy more.
Focus is now shifting to a conference call under way between Greece and its international lenders to see how Greece plans to make up its budget shortfall and avoid a disorderly default. The call may continue overnight.
With gloom widespread, investors took little comfort from expectations that the US Federal Reserve would introduce new measures to stimulate the US economy when it meets today and tomorrow.
The euro shed 1.1 per cent to $1.3648, and traders braced for a move to last week’s seven-month low of $1.3495. Losses in the euro helped push the dollar 0.7 per cent higher against a basket of currencies. The yen also benefited from a safety bid, with the euro down 1.5 per cent. The dollar slipped 0.4 per cent to 76.47 yen. – (Copyright The Financial Times Limited 2011/Reuters)
