More pain could be ahead as the Greek crisis threatens to spread across Europe. Hold on to your hats, and your portfolio.
Euro 0, Markets 1
The €110 billion Great Greek Bailout has failed to do the trick.
"The crisis in Greece has escalated significantly in recent days," said Tristan Hanson on Bloomberg. "Confidence in the long-term solvency of the Greek government has collapsed. As ever, from a global financial markets perspective, the big risk remains contagion."
Ten-year Greek bonds are still yielding 9.4%. Admittedly the yield is down substantially from its pre-bailout level of over 15%, but the market is still saying this crisis is far from over.
We didn't quite have contagion yesterday, but we did have a quadruple whammy, all of which added up to the FTSE 100 index plunging 2.56% to 5,411. FTSE 6,000 suddenly looks a dim and distant memory.
The Quadruple Whammy
Whammy #1: Europe's debt situation. With the Greek bailout hardly instilling confidence of economic stability in that country, the market's attention turned to fellow Eurozone problem children Spain and Portugal.
Our banks were hardest hit, with Lloyds Banking Group (LSE: LLOY) down 7.4%, Royal Bank of Scotland (LSE: RBS) off 6.6% and Barclays (LSE: BARC) down 4.5%, hence proving their speculative nature.
Whammy #2: Not content with taking the world snooker crown, the Aussies are now proposing a new Resources Super Profits Tax (RSPT) to grab 40% of profits (above the long-term bond rate) made from exploration and production Down Under.
Australian quoted miners BHP Billiton (LSE: BHP) and Rio Tinto (LSE: RIO) were among the largest fallers, slumping 7.9% and 6.4% respectively.
Whammy #3: A Chinese slowdown or even crash. China's central bank recently ordered a third increase in banks' reserve requirements this year.
Add to that, the China purchasing managers' index declined in March, spurring concern demand will slow in the world's fastest-growing major economy. And to top things off, investor Marc Faber recently said the Chinese economy may even have a crash in the next 9 to 12 months.
Whammy #4: A renewed terrorist threat in the US, as witnessed by the recent New York Times Square attempted car bombing.
Nervous Markets
Investors are definitely nervous. Here in the UK, we've also got a general election to contend with, complete with the real possibility of a hung parliament.
The Financial Times headline screamed "Risk appetite deserts Footsie." It says it all. Since March 2009, world stock markets have been a one-way, no-lose bet. Simply buy any old rubbish shares, sit back and watch your wealth grow. It has been great fun.
But things are a changing. Markets are becoming more volatile. Take a look at the last 5 trading days here in London…
| Day | FTSE 100
Close | Points
Change | Percentage
Change |
|---|
| 4 May 2010 | 5,411 | -142 | -2.6% |
| 30 Apr 2010 | 5,553 | -65 | -1.2% |
| 29 Apr 2010 | 5,618 | +31 | +0.6% |
| 28 Apr 2010 | 5,587 | -17 | -0.3% |
| 27 Apr 2010 | 5,604 | -150 | -2.6% |
For all the ups the market seemingly has had in 2010, it is now precisely flat on the year. All that hard work for precisely nowt.
Such is life for the short-term investor. When markets rise, they tend to do so in a relatively orderly fashion. A few points here, a few points there. But when markets fall, they tend to do so rather suddenly, as witnessed by just two days in the above table wiping roughly 5% off shares
What Next?
So where to from here? Of the whammies mentioned above, the European problem still has the potential to do the most damage. "Spain and Portugal are both endangered species," said Stanley Nabi on Bloomberg.
In the Financial Times, a leading fund manager was quoted as saying "We cannot see how Spain and Portugal can avoid going to the IMF/EU for loans as they both have deteriorating public finances that can only in our view be rectified by international help."
As I've been saying recently, now is not the time to be embracing risk. It's a time to be conservative. It's a time to review all of your portfolio holdings, weeding out the weakest, selling the over-valued.
Of course, the time for those actions is always now, regardless of Greece and Spain and their 20% unemployment, Portugal, the Euro and the election. It's just that right now, despite a recovering economy, the threats to the downside appear to outweigh the upside.
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