On Oct 21, Greece received 8b payment from the troika, the sixth installment of 110b bailout negotiated in May 2010. In a previous article on when Greece will likely to default, we believed that a Greek default is beneficial to Greece. Default on their current debt will help Greek government with their cash flow and improve their finances faster. They would not be able to borrow after default, but the easement on the current debt would allow them to better live within their cash flow.
TSX – 12,327.51
Dow – 11,284.54
S&P 500 – 1,176.80
Nasdaq – 2,479.85
This quarter has been particularly volatile until markets made a recent sharp turn. In the last few days of the second quarter, according to the New York Times, the S&P index was only down 0.4 per cent.
There have been a number of dips in the market this quarter due to the following factors:
Interest rates were raised by the European Central Bank today for the second time this year. The action signifies an attempt to tackle inflation, despite many countries dealing with the euro crisis debt. One country that may benefit is Portugal, who had their debt downgrades this week.
Recent data coming from the euro zone has been largely disappointing, despite unoptimistic expectations. The most recent industrial orders rose less than predicted, with growth in dominant service sectors also slowing. The ECB will be expected to make one more rise before the end of the year to 1.75%.
This news will put pressure on an already fragile market. The financial markets were rattled by the news that Portugal’s debt would be downgraded, and has cast doubts on the attempts to rescue euro zone states. Many believe that while Greece may be out of trouble, the ECB has also shown a weakness. In agreeing to the second bail out, the ECB ultimately refuses to restructure Greek bonds. This action will stop Greek banks gaining the funds they need and further crippling their economy.
With the inability to work without funding, the Greek banks will always rely on someone else to help. It won’t be until they can work on their own that the euro crisis will be officially over. With the funding they will just build deeper debt and continue the struggle.
New doubts have been cast over the Eurozone as Portugal’s credit rating has been downgraded. This shocked the financial markets and both the euro, and European shares fell, ending the seven day rally.
The pessimistic rating comes soon after a new center-right Lisbon government was setting the austerity plans. These went beyond the demands by international traders and questioned the EU strategy on dealing with the EU debt crisis.
The problem is that with so many issues circulating the crisis in Europe, no one really knows where to look. Greece is trying to handle their catastrophic problems, but while this happens Portugal is also finding themselves with increasing debt. Many people may blame the EU strategy, but with so many problems to deal with, does any strategy really stand a chance?
This is without the inclusion of Ireland. One of the many countries that received a bailout in the crisis who will be announcing spending cuts next year. This measure has to be taken in order to meet deficit reduction targets. The chances are that Ireland may need a second bailout if it fails to grow quickly enough to meet the debt repayment schedule.
At the end of last week many investors were expecting a drop in the manufacturing index. But they were pleasantly surprised when it climbed to over 55.3, from 53.5 in May. This helped push the market to its highest weekly gain in a year.
Despite this, the market is still temperamental, with drastic changes occurring over only a few days. For example, only last week riots erupted in Greece and the nation was close to all out chaos. This forced the market down as pessimism set in. Days later an austerity legislation was passed and opened the door to financial aid.
This week looks set to hold much the same chaos with a meeting of the European Central Bank. Specialists expect that they will raise interest rates, this being something which could cause further damage to countries such as Ireland and Portugal.
No doubt Greece will also be center stage with finance ministers structuring the bailout. This needs to be done in such a way that credit-rating agencies don’t classify it as a default. Even using the word is deemed dangerous and the wrong step could see the euro crisis return to the beginning of last week.
In Canada the unemployment rates will be announced. Last week an announcement confirmed that GDP growth halted in April, which brought a negative outlook. With some asking the question of whether the jobless rate of 7.4% will rise?
Despite the gloomy outlook for the week, at least we know it will be interesting to see how it pans out.
The Toronto stock market looks set for a higher open today as traders await the news of economic growth. This rise follows the impact of the vote in Greece which enabled them to secure finances for extended debt repayments.
In pre-market trading the Canadian dollar rose 0.6 cents high to 103.63 cents. Among the biggest fallers were gold, which was down $1.80 to $1,508.60 per ounce. And oil which fell after a surge in the previous days.
After weeks of uncertainty, many industry experts are relieved that the situation in Greece has come to a slight conclusion. Lawmakers in Greece are close to voting in favor of the implementation bill, which will confirm the future finances. This has helped solidify the market, despite continuing problems with the Greek government.
Thursdays trading is expected to be more volatile than usual, as it marks the end of the month, and the end of a quarter. This is a point where a wide mix of traders close off trades and book profits.
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