Equities slump further as Greece goes back to elections

European equities suffered more losses on Tuesday, with the FTSE 100 losing over 0.5% as coalition talks between the major Greek parties failed, meaning that the country would go back to another election, adding yet more uncertainty as to whether Greece will remain in the euro or not.

Whilst EU finance ministers attempt to brush off speculation that Greece may in fact end up leaving the euro as propaganda and nonsense, the market reaction affirms the fact that this is a scenario investors are now beginning to believe will soon be a reality. And what’s more, the rhetoric used by many significant figures in Europe, such as the IMF chief Lagarde, who said today that ‘we have to prepare for anything’ shows that leading figures are starting to digest that this is becoming a real option.

For now, the market is facing yet more political instability in Athens. Investors hate uncertainty and right now the political situation in Greece can best be summed up as being in no man’s land. We will need to wait for a new set of elections before ascertaining who will form a new government and whilst it is hoped turnout could be higher, there is no certainty that a new election will be anything different to the last, forcing yet more coalition talks that fail to bear fruit.

In the good times investors trade on the front foot with optimism but in uncertain times investors trade on the back foot and fear the worst. We are seeing the latter right now. We need to see investors starting to bargain hunt if we are to see a more concerted bounce in European equities. Tomorrow’s Bank of England quarterly inflation report will be used by investors to gauge the realistic chance and timing of any more QE from the UK Central Bank, whilst we will also see the FOMC minutes released after the European close. Both factors could play a role in the confidence of investors to buy back into a UK stock market that has seen significant falls since mid March.

It was the news out of Athens regarding the fact that the country would face fresh elections that sent most European indices further into red territory today, with many investors still looking to downsize risk. 

It’s been a day of mixed economic data out of Europe and the US, giving traders little confidence to buy back into the market. 

Before the European trading session opened we saw a much stronger reading of German GDP for the first quarter, with the German economy recovering to grow at a pace of 0.5% in Q1 against forecasts of 0.1% growth. This was a positive surprise and helped stocks to post early gains. At the same time, eurozone GDP flat lined in Q1, against expectations of a -0.2% contraction, whilst Italian GDP contracted more than expected at -0.8%.

German ZEW numbers badly missed forecasts, coming in at 10.8 against consensus of 19.0, whilst US retail sales grew just 0.1% in April, missing estimates of 0.2%. New York Manufacturing however rose to 17.09 against forecasts of 8.50.

Spanish stocks continue to be hit hard, however, with the IBEX losing another 1.6% today and trading below the March 2009 bottom that saw most global indices recover following the height of the financial crisis. 

Benchmark Spanish 10-year bond yields continue to race higher also, hitting 6.373% today, whilst Italian 10-year bond yields also rose above the important 6% level. Should both respective bonds remain stubbornly above the 6% level and indeed breach November’s highs of 6.7% and 7.3% respectively, this would mark a significant step in the deterioration on both debt confidence and the euro crisis. 

The FTSE 100 has now lost over 9% from its March high of 5989 in this current correction.