European bank stocks and borrowing costs for Italy, Spain and Portugal bore the brunt on Monday of financial markets’ fright at the growing risk that Greece will leave the euro.
The worst fall in shares for six months and a 30 basis-point rise in bond yields for other southern euro zone states was the start of an acid test of policy-makers' hopes that, if Greece does go, the rest of Europe is isolated from the fall-out.
After an initial wave of selling, however, most markets recovered ground. The one-day moves were large but looked pale in comparison to the events of 2008 or the last major round of Greek-spurred turmoil in 2011-12.
“The European financial system now has much less exposure to Greece than in 2011 and 2012,” said Stephanie Flanders, Chief Market Strategist for Europe at JP Morgan Asset Management.
“It is also better equipped to deal with contagion to other countries and, so are the countries themselves.”
Greece’s banks and stock market were closed on Monday, and were expected to remain so until after the July 5 snap referendum called by Greek Prime Minister Alexis Tsipras on further austerity demanded by euro zone partners.
The euro zone’s banking index .SX7E fell 5.5 per cent, with the worst falls for Portuguese, Spanish and Italian lenders.
Adding to the gloomy backdrop, China shares dived another 3 per cent, bringing the losses in the past two weeks to 25 per cent, with the Chinese central bank’s measures on Saturday to support the economy failing to calm jittery investors.
Buying opportunity By mid-morning in Europe, there were a number of voices arguing that the sell-off represented an opportunity to buy shares cheaply in markets into which the European Central Bank will pump billions of extra euros over the next year.
“I think Greece will vote to remain in the euro, and the market seems to agree with me,” said Lex van Dam, a hedge fund manager at Hampstead Capital. “I was a buyer on the initial dip this morning in both the euro as well as the European stock markets, and continue to remain constructive.”
The euro itself proved resilient, recovering much of a roughly 2 per cent initial fall to trade just half a per cent lower at $1.1102, well within the past month’s ranges.
It was helped by Switzerland’s National Bank confirming it had intervened to counter gains for the franc and by a fall in U.S. Treasury yields that reflected speculation the Federal Reserve would hold off for longer in raising interest rates if the trouble in Europe worsens.
“Fed/ECB divergence bets have been partially wiped off as a result of rising Grexit risk (and) less favourable U.S. dollar rate differentials slow dollar strength down,” said Stephen Gallo, head of European FX Strategy with BMO in London.
Wall Street falls
.S. stocks extended their losses in heavy trading on Monday, adding to a global sell-off, after a collapse in Greek bailout talks intensified fears that the country could be the first to exit the euro zone. All three major indexes fell more than one percent on the same day for the first time in more than a month as investors dropped riskier assets such as equities and commodities. Volatility rose sharply as nine of the 10 main S&P sectors retreated. The only group to rise was utilities, considered a defensive play.
In Europe, the blue-chip Euro Stoxx -50 index suffered its biggest one-day fall since 2011.The European Central Bank froze funding to Greek banks, forcing Athens to shut banks for a week to keep them from collapsing. In U.S. data, the pending home sales index, issued by the National Association of Realtors, rose to a nine-year high. Investors have been keeping a close eye on data to see if the U.S. economy has recovered from a slow start at the beginning of the year. At 12:06 p.m. the Dow Jones industrial average was down 198.65 points, or 1.11 percent, at 17,748.03, the S&P 500 was down 23.56 points, or 1.12 percent, at 2,077.93 and the Nasdaq Composite was down 66.14 points, or 1.3 percent, at 5,014.37. On the Nasdaq, 2,152 issues fell and 551 advanced. The S&P 500 index showed two new 52-week highs and 19 new lows, while the Nasdaq recorded 39 new highs and 82 new lows.
FTSE slips sharply
Britain’s top share index fell sharply on Monday, with investor sentiment punctured by Greece’s deepening debt crisis following the breakdown of talks with creditors and Athens’ imposition of capital controls.
Travel and leisure stocks were hit hard by events in Greece, a popular holiday destination for Europeans, as well as news that tour companies were evacuating thousands of holidaymakers from Tunisia after a gunman killed dozens of people at a beach hotel on Friday.
The blue-chip FTSE 100 index was down 110.60 points, or 1.6 per cent at 6,643.10 points by 1045 GMT, also pressured by a 1.8 per cent drop in U.K. banking index after Greece closed its banks to check the growing strains on its crippled financial system.
Greek Prime Minister Alexis Tsipras announced a referendum for July 5 to decide whether the country should accept or reject the bailout agreement offered by creditors.
“Tsipras devolving the decision to the electorate is a populist move that reduces the likelihood of a deal with Greece’s creditors and which causes the kind of uncertainty markets hate,” Lorne Baring, Managing Director of B Capital Wealth Management, said.
“We expect downward pressure to resume with this new twist in the Greek saga but it may be short-lived as the political pressure to resolve the situation mounts.”
Among companies evacuating tourists from Tunisia following Friday’s attack, TUI Travel shed 6.6 per cent, making it the biggest FTSE 100 faller.
The firm’s Thomson and First Choice businesses said they had around 6,400 customers across the country.
Europe's Stoxx 600 Travel & Leisure index fell 2.2 per cent, putting it on track for its biggest daily fall since December.
“The whole situation is pretty awful, and the travel industry is going to be hit the most. People are being repatriated from Tunisia, there are cancellations, it all has a bad effect on travel companies,” Mark Priest, sales trader at ETX Capital, said.
“People might also be nervous about booking new holidays, so it could have a longer term impact too.”
International Consolidated Airlines Group and easyJet were down 3.3 and 1.8 per cent.
Basic resources stocks also suffered, with the U.K. mining index falling 1 per cent.
Shares in China, the world’s top metals consumer, ended more than 3 per cent lower on Monday despite fresh monetary easing from Beijing. Chinese shares have fallen about 25 per cent in two weeks.
