Bearish markets remain in thrall to Greece

June 20, 2011

By Ian Campbell
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

LONDON — The sell-off in equities and commodities is tempting for bulls but the falls could easily get worse.

Global stocks are down by 8 percent since May 2. The oil price has slumped by 19 percent over the same period. Three forces are at play turning equities and commodities markets bearish. The U.S. Federal Reserve will stop printing money at the end of this month. Global economic data continues to show a slowdown. And, most alarming of all, there’s the lack of even a temporary patch-up for Greece. That increases the risk of a disorderly default in the euro zone, which would slam the markets.

The first two threats the markets will get over in time. Some recent global data is unquestionably weak. But the March earthquake in Japan, which disrupted supply chains, and some natural easing in the pace of recovery, may be responsible. Overly buoyant commodity markets were themselves a negative. Oil at well over $100 a barrel was a huge burden for a global economy that is supposed to be in rehab. The current cooling of oil prices is supportive of growth and therefore reassuring.

But for investors the calculations are complex. Falls in oil and other commodity prices may reflect the imminent end of the $600 billion second round of U.S. Federal Reserve money printing. It’s hard to know how markets will cope without the support of the Fed’s ample liquidity. And in emerging economies, where inflation has taken off, interest rates have been rising fast — another negative for equities and commodities. The adjustment will not be easy.

By far the biggest problem is Greece. There will be disbursements of relief but fear surrounding Greece and the euro periphery will linger. The European Union and International Monetary Fund will wait for Greece to back the government and its fresh austerity measures. But the Greek government is weak, protests are vehement, and an enormous fiscal turnaround to achieve primary surpluses of 6 percent of GDP is still required.

Global growth should eventually prove reassuring and underscore the value case for stocks — global equities trade on a forward price-earnings ratio of 12, says Citi research — and the long-term prospects for commodities. But the euro zone situation is grim indeed and favours the bears.

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