The European stock markets keep tumbling down Monday as the IMF warns about acute debt problems in the G7 countries, German chancellor Angela Merkel says investors should not expect a solution to the Greek crisis this week and India makes its first rate hike in almost two years. The dollar strengthens and oil prices fall.
“With the lack on specific promises of support from the EU, the fear of a public debt crisis is once again picking up .”
European shares continue to slide Monday after The International Monetary Fund says advanced economies face acute challenges in tackling public debt. Risk premiums on government bonds are increasing, the dollar is strengthening, commodity prices are falling and the U.S. Index futures are declining.
The Stoxx Europe 600 Index dropped 1.1 percent Monday morning while the MSCI Asia Pacific Index down 0.9 percent.
An index of basic resources shares fell 1.6 percent, the biggest decline among 19 industry groups on the Stoxx 600.
The Dollar Index, which tracks the currency against those of six U.S. trading partners, climbs for a third day, adding 0.1 percent. The dollar have strengthened against 14 of its 16 most-traded counterparts.
In Greece the ASE Index is diving, down more than 3 percent, and the premium investors demand to hold the nation’s 10-year notes instead of benchmark German bonds have widened by 16 basis points.
The cost of insuring against a default on Greek government bonds rose, with credit-default swaps climbing 7 basis points to 337, according to CMA DataVision.
Credit-default swaps on the Markit iTraxx Crossover Index of high-yield European corporates is up 17 basis points to 470, according to JPMorgan Chase & Co.
U.S. stock-index futures are also declining sharply at the moment.
Rate Hike Anxiety
India’s central bank surprisingly raised interest rates for the first time in almost two years late on March 19, saying that controlling prices was imperative after inflation accelerated to a 16-month high.
“While the market’s focus has been on “double dip”, high unemployment and increasing public budget deficit, the inflation threat has been given little attention. The Federal Reserve has put a damper on the fears by arguing that inflation will remain low due to excesses in capacity and high unemployment. Commodity market suggests, however, the opposite. Oil prices are now up 125% since January 2009 and is on the highest level in history except for the period October 2007 to October 2008. The same is true for iron ore. The price of iron ore at its highest level since January 2009 and the highest level in history, but from a brief period in 2008,” the Norwegian brokerage firm Terra Markets writes in their weekly analysis.
“There have been several attempts to put the blame for higher commodity prices on speculators, but a strong demand in emerging economies is a more likely explanation. Currently it is mainly in Asia that inflation is increasing, but the commodity rally could quickly drive the inflation rate in the leading Western economies in the air again when growth picks up. If the inflation surprise on the upside, rate hikes can come sooner rather than later and put a damper on the financial markets,” Terra Markets warns.
“With the lack on specific promises of support from the EU the fear of a public debt crisis is once again picking up,” the analysts point out.
German Chancellor Angela Merkel told investors they shouldn’t expect this week’s European Union summit to agree on any aid package for Greece.
EU leaders must not create “illusions” for markets by building expectations for Greek aid, she said in an interview with Deutschlandfunk that aired Sunday. Her remarks came after Greek Prime Minister George Papandreou and European Commission President Jose Barroso said the EU should spell out its rescue plan at the March 25-26 summit in Brussels.
The German chancellor told investors they shouldn’t expect this week’s European Union summit to agree on a package to help Greece tackle the region’s biggest deficit.
A survey conducted by the Financial Times also show broad opposition among the German people against a possible rescue package for Greece.
“It is all set for new uncertainties in the financial markets if the EU leaders do not agree on a solution for Greece,” Terra Markets concludes and their investment advise is:
“We think it may be time to secure some profits and take an early Easter holiday.”
Disclosure: No positions