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Monday, June 18, 2012

Nervous traders look ahead to key weekend in Europe



Brendan Mcdermid / Reuters
Traders work on the floor of the New York Stock Exchange Thursday.





It’s rare for an election in a country as small as Greece to have global implications.
Yet investors here and around the world will be on the edge of their seats this weekend when Greeks go to the polls for what many see as a referendum on remaining in the eurozone.
As if that wasn’t enough to make markets nervous, Spain’s rising borrowing costs are setting off alarm bells, and Italy may not be far behind. Storm clouds gathering in Europe could result in a perfect storm for U.S. investors, analysts say.
“Greece is a small country, far away, but a financial crisis in a small country gets propagated to other parts of the world; it’s not good news for the U.S. It will get translated over here,” said Hugh Johnson, chief investment officer of Hugh Johnson Advisors in Albany, N.Y.
he Greek election matters to investors because it could help determine whether the two-year-old financial crisis in Europe is being contained or about to get much worse.
Observers see the election as a referendum on the decade-old euro currency. In elections last month Greek voters turned away from traditional political parties seeking to restructure the economy and toward more radical parties that promised to pull the country out of bailout and austerity agreements with other eurozone countries.
If Greece abandons its bailout terms, international creditors could stop providing the rescue funds, leaving the country to default on its debt and abandon the euro -- a jolt that could mark the beginning of the end for the unified currency.
U.S. firms already are feeling the impact of the downturn in Europe, our largest trading partner. U.S. companies have seen European revenues plunge from 29 percent of the total in 2010 to 14 percent last year, according to Richard Peterson, director at market research company S&P Capital IQ.
The crisis in Europe was at first confined to Greece, and then Portugal and Ireland. But the sovereign debt crisis now threatens to engulf larger members of the Eurozone -- Italy and Spain.

Related: Spain's debt costs hit the danger level

Spanish 10-year bond yields hit 7 percent Thursday -- a level that has triggered rescue efforts for other eurozone members. Italian borrowing costs also rose sharply. The rising borrowing costs suggest investors don’t believe the nations will be able to pay back their debts.
Yet stocks rose sharply Thursday, at least partly on news that central bankers are standing by, prepared to provide liquidity in a coordinated move in case the Greek election triggers market turmoil. Cantral bankers also are closely watching elections in France and developments in Egypt, where the Supreme Constitutional Court's dissolved the Islamist-dominated parliament ahead of a weekend presidential runoff.
Britain's government and the Bank of England, meanwhile, also went on the offensive, saying it will flood its banking system with cash in a move to get credit flowing through its economy.
A senior U.S. official cautioned that the Greek election will not provide "the definitive signal on what happens next" in the eurozone debt crisis, according to Reuters.
Johnson pointed to the 1997 Asian financial crisis, which started with the collapse of the Thai currency and eventually spread to much of Southeast Asia and Japan, raising fears of a global economic collapse.
“The risks are getting higher,” Johnson said. “You’re seeing that in the U.S. markets, and you’re seeing that in the European markets. Both are telling me you need to take a more defensive position with your investments.”
“We have certainly done that,” Johnson added. “We are bolstering our defenses by overweighting healthcare stocks, utilities, telecom stocks and consumer staples.”
U.S. investors have shown a steady aversion to taking on market risk. The broad U.S. stock market, measured by the Standard & Poor’s 500-stock index, has lost 7 percent of its value since hitting a recent high on April 2.
Dan Greenhaus, chief global strategist at BTIG, sees Europe-driven market uncertainty continuing for the remainder of the year.
“From a U.S. investment standpoint, you’re still left in a bubble of uncertainty that has plagued the market for not just the last couple of weeks, but the last couple of quarters,” Greenhaus told CNBC. “The unfortunate reality is we are likely to face that over the next couple of quarters.”
Rebecca Patterson, chief markets strategist for the global institutional arm of J.P. Morgan Asset Management, is more sanguine. While she thinks the market uncertainty will last, she also thinks any movements in the market will be limited.
The risk of markets moving to the downside is mitigated by the fact that central banks are ready to step in to prop up economies, Patterson told CNBC. European leaders don’t want the euro to completely fail, and so will do whatever is required to keep the eurozone from breaking up.
If Greece stays in the euro, “you could get a bit of a relief rally,” Patterson said. “But that doesn’t take away the bigger structural issues that Europe faces in countries like Spain.”


Martin Wolf, Financial Times, discusses whether the EU will stay intact; the outcome of the Greek elections, and its impact on global markets.

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