US Economy Provides Some Relief to Markets

by Pan Pylas
Wednesday May 16, 2012
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LONDON (AP) - The shockwaves from Greece’s failure to form a coalition government continued to reverberate around markets on Wednesday, though upbeat U.S. economic indicators gave the more positive-inclined investor something to latch on to.

Greece is headed for another general election next month after nine days of unsuccessful talks since the May 6 poll yielded a split vote with no one party able to govern on its own.

The next election on June 17 could well become a referendum over Greece’s place in the euro - which could mean the established Greek political parties that took a hammering in the first poll might do better. However, markets are still worried that Syriza, the radical left coalition that came a surprise second in the first election, may actually emerge as the biggest party in the next time round. Led by Alexis Tsipras, Syriza has steadfastly stood to its anti-austerity, anti-bailout position.

"The fear is that the anti-austerity vote will grow," said Fawad Razaqzada, market strategist at GFT Markets. "The big issue is how this squares with the Greeks’ desire to keep the euro as their currency."

Without agreeing to another round of austerity measures, it’s conceivable that Greece’s partners in the eurozone will withhold the next round of bailout cash that’s keeping it afloat. An exit from the euro could then become inevitable.

In Greece, that prospect has led to further outflows of Greek deposits, with some €800 million thought to have made their way out of Greek banks since the election. Those deposits may have found their way into safe-haven alternatives, such as German and British ten-year bonds, which have risen to record highs in the secondary markets. The dollar has also mustered a lot of support through its perceived-status as a safe haven asset, especially against the euro, which has sunk to near four-month lows of around $1.27.

European stocks, having opened sharply lower, steadied having taken a battering over the past week or so amid the political gridlock in Greece. Figures showing a 1.1 percent monthly rise in U.S. industrial production and a further stabilization in the housing market helped to shore up markets as Wall Street opened.

"Financial markets remain focused on Europe but at least the U.S. data are not adding to the worry," said Jennifer Lee, an analyst at BMO Capital Markets.

In Europe, the FTSE 100 index of leading British shares was up 0.1 percent at 5,441 while Germany’s DAX rose 0.4 percent to 6,425. The CAC-40 in France outperformed its peers, trading 1.2 percent higher at 3,076.

In the U.S., the Dow Jones industrial average was 0.6 percent higher at 12,706 while the broader S&P 500 index rose 0.7 percent to 1,340.

Though the U.S. data provided some relief, the focus of attention over the coming month until the Greek election will likely center on Europe’s debt crisis. The great fear is that other indebted countries, such as Spain and Italy, will suffer the fallout from contagion fears.

"Right now there is a serious risk that (investors) will not lend us money or they will do so at an astronomical rate," Mariano Rajoy told Spanish lawmakers.

Rajoy was speaking as the country’s bonds came under renewed pressure. The stabilization in markets later eased that pressure. Nevertheless, the yield on Spain’s ten-year bond stands at 6.27 percent. Though below the level hit last November, the rate is uncomfortably near the 7 percent level, widely-considered to be unsustainable in the long-run.

Earlier, Asian benchmarks recorded sharp losses earlier in the day.

Japan’s Nikkei 225 index dropped 1.1 percent to close at 8,801.17, its lowest close since Jan. 30, amid discouraging economic news. Core private-sector machinery orders fell 2.8 percent in March, the first drop in three months, Japan’s Cabinet Office said.

Hong Kong’s Hang Seng plummeted 3.2 percent to 19,259.83 and South Korea’s Kospi fell 3.1 percent to 1,840.53.

Mainland Chinese shares also lost ground, with the benchmark Shanghai Composite Index falling 1.2 percent to 2,346.19. The Shenzhen Composite Index dropped 1.4 percent to 942.04.

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