Markets: Greece Fears Overshadow Markets, Australian Rate Cut

Markets were battered again overnight by fears a surprise referendum in Greece might sink the last week's third bailout rescue and even the eurozone itself.

The poll, called by Prime Minister George Papandreou on Monday, took his government, the country and the rest of Europe by surprise.

And why is a referendum so dangerous? A poll last week showed 60% of Greeks opposed to the bailout and the stiff austerity terms.

Saying 'no' would mean the Greeks were not prepared to cut spending and debt to be bailed out by the rest of the eurozone (The ECB, EU and IMF in reality).

Markets dipped on the news in Europe and the US on Monday, Asian markets were more interested in the latest Chinese manufacturing figures, but by the time trading started in Europe and then the US overnight Tuesday, they were in full panic.

The Dow was off nearly 300 points or almost 25%, the S&P 500 fell 2.8% and the Nasdaq lost 2.9%.

London's FTSE 100 fell 2.2%, Paris' CAC 40 was off 5.4%, German's DAX lost 5%, Milan's market saw a big 6.8% drop and the Spanish market fell 4.2%.

The US market was down more than 300 points and 10 year US bond yields fell under 2% and then closed at 2%. (they were 2.31% last Friday)

A later news report which claimed a Greek Government member was saying the referendum idea was dead, helped stop the plunge on Wall Street and the Dow and other indices started retracing their earlier falls.

And reports from Athens suggest the Prime MInister is in political trouble.

There were two more defections from his Socialist parliamentary group on Tuesday and the threat of a third, which suggests they may lose Friday's vote of confidence, triggering the early poll that Mr Papandreou was trying to avoid.

Gold rose slightly, but oil and copper fell and the Australian dollar lost another cent, on top of the losses from the RBA cut yesterday.

But no one knows at the moment and the Greek parliament is due to start a three day debate tonight on the referendum with a vote scheduled for Friday night, Australian time.

The news stunned European leaders and forced France and Germany leaders and officials to hold a series of telephone meetings.

Germany's Angela Merkel and France's President Sarkozy said they will meet the Greek Prime Minister tonight, our time to discuss the issue and what can be done to kill off the idea.

The G20 leaders meeting starts in Cannes tomorrow and finishes Friday night. The poll will be top of the agenda as will its possible impact on the euro deal and the latest Greek bailout.

The news has seen the cost of Italian debt rise past 6% again (to a new high of 6.33%), rising fears it will be next to need help funding itself.

The European Central Bank bought a reported 5 billion euros of Italian bonds to steady the market, the second such intervention in five days. according to market reports.

The US Federal Reserve started a two day meeting overnight Tuesday and the news from Greece won't have thrilled it.

The looming eurozone recession threatens to roll over the US economy, and then other major economies, including China, especially if there's continuing financial instability.

Nor will it have been greeted warmly at the Reserve Bank of Australia which yesterday cut rates here for the first time in 31 months a move that seemed to be based on a bit of insurance for Australia should Greece and Europe continue to worry markets, as they are doing.

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As widely tipped the Reserve Bank cut its key interest rate yesterday, and major banks followed suit.

The RBA trimmed 0.25% from the cash rate, sending it down to 4.50%, the level that it was a year ago before the board meeting in November 2010 which saw a surprise increase to 4.75%.

It was the first rate cut in more than two years and saw the Australian dollar drop after the RBA decision, losing about half of a US cent to trade around $US1.048.

Australia joined central banks in Brazil, Turkey and Indonesia which have all cut rates in recent weeks in anticipation of a global slowdown.

And the local sharemarket lost 63 points or 1.4% on fears that the European financial crisis hasn't gone away. News that Greece is to hold a referendum in the latest austerity measures has raised fears the agreement last week could unwind.

The market's fall was echoed in other parts of Asia with the Nikkei down 1.7%, Hong Kong down 2% and Shanghai lower as well.

So for local investors the rate cut seems to have little impact, despite rate cuts supposedly being good for retailers and other discretionary spending groups.

Major banks, led by Westpac cut its standard variable rate by 25 basis points to 7.61%, effective from November 14. (Westpac reports its 2011 full year profit today)

The Commonwealth Bank also lowered rates on a series of variable home packages by 25 basis points and its main standard variable home loan rate will fall to 7.56% from 7.81%.

The Bank of Queensland and ME Bank also joined in, with similar rate reductions on their home loans.

But don't expect another rate cut, no matter what analysts and others might argue.

The RBA left no room for speculation in this area and it seems this, like last year's rate rise, could be it for a while.

The economy is doing better than it was a month ago.

In his post meeting statement, RBA Governor, Glenn Stevens said that "Over the past year, the Board has maintained a mildly restrictive stance of monetary policy, in view of its concerns about inflation.

"With overall growth moderate, inflation now likely to be close to target and confidence subdued outside the resources sector, the Board concluded that a more neutral stance of monetary policy would now be consistent with achieving sustainable growth and 2-3 per cent inflation over time."

"With labour market conditions now softer, the likelihood of a significant acceleration in labour costs outside the resources and related sectors in the near term has lessened.

"Accordingly, the Bank's current judgement is that inflation is likely to be consistent with the 2-3 per cent target in 2012 and 2013, abstracting from the impact of the carbon pricing scheme."

Mr Stevens' statement revealed the RBA is a little more confident about the outlook for Europe and the US.

"Recent information is consistent with a moderation in the pace of global growth, though fears of a major downturn have not been borne out so far.

"The pace of US economic expansion picked up in the September quarter, but is still only moderate and leaves considerable spare capacity. China's growth has slowed, as policymakers there had intended.

"Output in Asia has now recovered from the effects of the Japanese earthquake, and domestic demand in the region is generally expanding.

"Trade performance, however, is starting to see some effects of a significant slowing in economic activity in Europe, where the prospects are for economic weakness to continue.

"Commodity prices, while still at high levels, have generally declined over recent months.

"Financial markets have recovered somewhat from the turmoil of recent months, helped by stronger economic data in the United States and by signs that European governments are making progress in their efforts to deal with the sovereign debt and banking problems.

"Equity markets have gained ground and the Australian dollar has risen significantly as risk aversion has lessened.

"But it is likely to be some time yet before concerns about the European situation can definitively be laid to rest and the effects of the recent turmoil on confidence may result in a period of precautionary behaviour by firms and households."

We will find out today and tomorrow if this view that the economy has slowed when we get retail sales and building approvals for September. The trade data for the same month is out next Monday.

These will confirm that domestic demand is rising a bit faster than many think.

Already we have more evidence that home prices continue to drift lower (see next story).

But there was a small warning late yesterday from the RBA that the bloom is going off the resources boom: for the first time in three years there was a noticeable fall in the central bank's commodity price index in October (See below).

The RBA said the index fell 3.2% in October in Australian dollar terms, thanks to weaker prices for iron ore, coking coal, gold, base metal and rural commodity prices.

"Preliminary estimates for October indicate that the index fell by 3.9 per cent (on a monthly average basis) in SDR terms, after falling by 1.4 per cent in September (revised).

"The largest contributors to the fall in October were declines in the estimated export prices of coking coal and iron ore, reflecting weaker spot prices and a decline in contract prices.

"Gold and base metals prices, as well as the prices of most rural commodities, also fell in monthly average terms. In Australian dollar terms, the index fell by 3.2 per cent in October.

"Over the past year, the index has risen by 19 per cent in SDR terms.

"Much of this rise has been due to the earlier increases in iron ore, coking coal and thermal coal export prices.

"Reflecting the appreciation of the exchange rate, the index has risen by 16 per cent in Australian dollar terms over the past year," the central bank said.