Business

Saturday June 18, 2011

Global market fears Greek contagion effects

By JAGDEV SINGH SIDHU
jagdev@thestar.com.my


OFTEN movements of markets are a premonition of the future and what they are telling us now is that the future is not a pretty picture.

Stock markets are in reverse gear as economic news become more bleak by the day. The Dow Jones Industrial Average is now down over 4% for the past one month and the S&P 500 4.6% lower during the same period.

In Europe, markets too are in the red for the past month and similarly in Asia with the biggest loser among the major markets being the Shanghai stock exchange. Ironically, the FTSE Bursa Malaysia KLCI is the only mainstream market in Asia that is in positive territory over the past month.

And falls are not limited to equities. Commodities are generally down with West Texas Intermediate crude oil now around the US$94 to US$95 region, with the price falling in view of slower demand. Gold is marginally higher as a save haven commodity.

Rising tension: Rising tension over a planned rescue of Greece continues to dog bank stocks across Europe, as worries about a wider fallout outweigh confidence that losses on Greek debt should be absorbable. — Reuters

Economic concerns have been the main cause for the weakness in markets during that duration with latest economic indicators pointing to weakness just across the board.

And cracks are appearing from just about very possible angle.

In the United States, latest data are not as flattering at all. Industrial output data in the United States showed that production at factories, mines and utilities inched up a fraction of a point, but it was below what the market was expecting which was a 0.2% increase.

The housing industry is still flooded with supply although new housing starts look like increasing, unemployment still and issue and with the second round of quantitative easing coming to an end this month, further fillip from cheap money might not be as forthcoming gives the increases in inflation.

While US economic growth is not heartening at all, at least its now as bad as what the situation in Europe is.

Greece, which sparked all debt concerns in the continent, is on the verge of default. With it comes a huge risk not only to Europe but also banks and lenders in other parts of the world.

Former Federal Reserve chairman Alan Greenspan was quoted in a report by Bloomberg saying a default by Greece is almost automatic. With that, the risk of contagion on the US economy is high.

“There's no momentum in the system that suggests to me that we are about to go into a double-dip,” Greenspan said in the report this week.

While the economies of the developed world are like a boxer on the ropes, Asia's scenario is better but not absent of risk.

China, along with emerging Asia which has been driving much of global growth over the past year, too is experiencing some hiccups.

Retail sales in China has slowed to 16.9% in May, which is below the average growth in the past five years. Inflation, which clocked in at 5.5% in May for a 34-month high, has sapped spending power.

Not helping matters was the earthquake induced recession in Japan which has had resulted in supply shocks and lower growth rates in manufacturing in a host of countries around the world.

All of these seem to culminating in what New York University professor Nouriel Roubini calls a perfect storm.

He, in an interview last weekend, said fiscal problems in the US, a slowdown in China's growth and the debt problem in Europe may converge on the global economy in 2013.

“There are already elements of fragility,” he said. “Everybody's kicking the can down the road of too much public and private debt. The can is becoming heavier and heavier, and bigger on debt, and all these problems may come to a head by 2013 at the latest,” he said in an interview with Bloomberg.

World expansion may slow in the second half of 2011 as “the deleveraging process continues,” fiscal stimulus is withdrawn and confidence ebbs, Roubini also said in the report.

With threats to growth, even India, which has raised interest rates in the past to combat inflation, is holding back from future rate hikes on concerns of economic weakness.

For Malaysia, the outlook too is not as bright as it once was.

Economists have started to trim their forecast for economic growth in 2011 primarily due to the weakness in the global economy. AmResearch on Thursday cut their forecast for Malaysia's growth rate to 5% from 5.5%.

Nonetheless, AmResearch remains positive on the broader growth prospects for Malaysia saying that despite all the gloom and doom, it believes that all is not lost.

“With external demand expected to remain weak, prospective gains from the ETP in inducing higher domestic demand and investments will be the major driving force in avoiding any further economic declines due to the debt crisis in the Eurozone as well as the contractionary impact from the Japan earthquake, tsunami and radioactive threats,” says AmResearch senior economist Manokaran Mottain in his report Thursday.

Credit Suisse economist Wu Kun Lung in a note yesterday said sequential growth is likely to slow further in the second quarter due to weaker global demand and supply chain disruptions.

“But we expect growth to re-accelerate in the second half, when global growth momentum picks up and more domestic investments from the government's Economic Transformation Programme come onstream,” he adds.

  • E-mail this story
  • Print this story
  • Bookmark and Share