Markets tumble as 'Grexit' fears persist

Tom Tong15/May/2012Currency Updates

GBP

Sterling hit a 3-1/2 year high against a floundering Euro on Monday as political deadlock in Greece fuelled concerns. Sterling was one of the biggest risers yesterday, continuing to benefit from haven demand in Europe. The pound rose 0.7 per cent to a fresh annual high against the Euro and 0.4 per cent higher against the Dollar. It would appear that the low-yielding pound is being used as a safe haven destination for investors shifting funds out of the troubled eurozone. If today’s UK trade figures, which are expected to be bad, in fact turn out to be worse, it could cause an abrupt end to the Sterling’s recent bullish rally. However, the next focus for investors will be the Bank of England’s quarterly inflation report on Wednesday, in which the central bank will give its latest UK growth and inflation forecasts.

EUR

The Euro was downsold once again in the markets yesterday as participants shunned the single currency thanks to concerns over rising Spanish bond yields and ongoing uncertainty regarding the future make-up of Greece’s government. The euro fell 0.8 percent on Sterling, the lowest level seen since early November 2008 and the biggest daily percentage loss since March 13. The Euro continued to fall against its it other major partners trading down on the day. Over the weekend Greek politicians failed to form a coalition government causing the Euro to reach its lowest levels against the US Dollar since January (a new four-month low) and provoking worries of the potentialimpact on the single currency if Greece were to leave the eurozone. Spanish 10-year bond yields over German Bunds hit a new high yesterday also, as the Spanish yield passed 6 per cent again. The market will have an eye on an auction of Spanish sovereign debt later in the week. Moody’s Investors Service on Monday cut the long-term debt and deposit ratings for 26 Italian banks by one to four notches, highlighting the tough environments in Italy and Europe. The ratings for Italian banks now are among the lowest within advanced European countries, reflecting these banks’ susceptibility to the adverse domestic and European operating environment, casting a further gloomy shadow over the eurozone.

USD

The situation in Greece prompted investors to dump riskier assets and buy the safe haven US Dollar, which has an inverse relationship. As a result the Dollar rose against other major currencies amid concerns over global growth as China announced further monetary easing over the weekend following disappointing growth figures for April. The Dollar benefited from a generally ‘risk-off’ trading environment, which pushed global equities indices sharply lower. Banking sector shares suffered losses in anticipation of the effects of a disorderly Greek default. Investors will be reacting to data out today from the US regarding core inflation (CPI) and retail sales, which may either spur or dampen past Dollar gains.

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Written by Tom Tong

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