EUROPEAN stocks started the day with losses of 4% or more as investors reflected on the weekend news from Greece: of the planned referendum, bank closures and capital controls. The sell-off reflected a sharp change in mood compared with Friday, when investors were expecting that Greece and its creditors would reach a deal. The Portuguese stockmarket was one of the worst affected, falling almost 6% at the open on fears that the economy would be dragged into the crisis (the Athens stock exchange is closed).
Contagion was seen in the bond markets too, with Spanish and Italian 10-year bond yields rising around 18 basis points, while the German equivalent fell 15 points; a spread widening of around a third of a percentage point. The euro was slighly lower on the news, falling less than 1% against the dollar. While uncertainty over Greece's future is bad news for the European economy, traders had been using the euro as the basis for a "carry trade"; borrowing euros and investing the proceeds in higher-yielding risky assets. As those traders pulled back from their risky bets, they would have paid back the euros they borrowed, limiting the currency's fall.
Traders had three other factors to consider, which might limit losses as the day proceeds. The European Central Bank could step into the market to buy bonds, particularly in places like Portugal, Spain and...Continue reading
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