The Overnight Report: Europe Plunges Back Into Disarray

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By Greg Peel

The Dow fell 297 points or 2.5% while the S&P lost 2.8% to 1218 and the Nasdaq dropped 2.9%.

Across the world right now those with any reason to care are likely wishing the once globally insignificant economy of Greece could be set up on a kicking tee and booted as far into the Mediterranean as possible where it can sink or swim on its own, and no one would much care which. Perceived as lazy tax cheats, the people of Greece will potentially now determine whether or not the world will plunge into Depression in order that the Greek lifestyle not be compromised.

It was early yesterday morning Sydney time that news came through of a declaration from Greek prime minister George Papandreou that the new Greek bail-out deal, which includes strict austerity measures and is at the fundamental centre of last week's announced plan to save Europe, must be put to the Greek people in a referendum. Europe and the US had been more focussed on problems in Italy at the time but falls on Asian zone markets reflected this renewed uncertainty. 

When European markets reopened last night both the French and German stock indices plunged 5%, led down by those banks that last week looked like they might be out of trouble. The Dow fell from the Wall Street open and by lunch time was down 320 points.

Then news came through from the Greek opposition party that a referendum would not have parliamentary backing and the idea was thus “dead”. The Dow bounced 100 points. Right at the death, however, Papandreou reiterated his intentions and as we head into the Asian zone opening today, barring any further news wire bomb shells, the Greek government will go to parliament proposing a referendum be held in January. 

The implication is thus that having last week seen light at the end of the European debt tunnel, the world will be plunged back into darkness again for another two months. Merry Christmas.

However, if anything is certain in Europe it is uncertainty, and the capacity of European politicians to complete stuff things up at the final hurdle. Papandreou supposedly now must survive a confidence vote challenge in parliament this Friday. If he loses, a Greek general election must surely follow. When will that be held? Perhaps an interim coalition government can be formed which would put Greece back on track to accept the austerity measures rather than put them to the people. If Papandreou wins, then the question will possibly be asked of the Greek people whether they are happy with the strict new austerity measures. You know the Greek people – they're the ones you see on tele rioting in the streets in protest over strict austerity measures. 

Polls suggest 60% of Greeks are opposed to those measures. Yet another poll suggest 70% of Greeks do not wish to leave the euro. And one can only presume Greece must exit the eurozone if it votes down the bail-out package. It would no longer be eligible for EU-ECB-IMF support. Greece would fully default on its debt and send European banks into bankruptcy, setting off a chain of destruction across the globe.

Where the hell does all of this put us? Tomorrow night the G20 leaders meet in Cannes. It previously seemed if that meeting would simply provide solidarity around the proposed European plan but now the onus has fallen on those leaders to link arms and announce a globally coordinated contingency strategy. Papandreou is due to meet with Merkel and Sarkozy at some point and you can imagine how friendly that exchange might be. Not only are Italian sovereign debt yields blowing out to default-potential levels but French yields are on the move as well.

We just don't know. Global financial markets are not trading on value, earnings expectations and economic data any more. They are trading on headlines and right now the vagaries of the Greek constitution. Tonight the Fed will release its latest statement on monetary policy and Bernanke will hold a press conference. No doubt he will reiterate that QE3 is loaded into the chamber ready to be fired if need be. Yesterday's RBA rate cut is beginning to look prescient.

It did not help the global cause last night that it was manufacturing PMI day, and that the numbers were not encouraging.

Australia's result was actually the most promising given a rise to 47.4 in October from 42.3 in September. That's a solid slowing of the rate of contraction, but still it represents contraction. China's official PMI disappointed with a fall to 50.4 from 51.2 to mark the lowest level in nearly three years. By contrast, the HSBC equivalent (which leans more to SMEs than the official number does) rose to 51.0 from 49.9 to confirm the first return to expansion in four months.

The news elsewhere was all bad, and all worse than expected. The UK found a brief moment to celebrate when its first estimate of September quarter GDP came out at a better than expected 0.5% growth, but the relief was short lived when it was revealed the UK PMI had plunged to 47.4 from 50.8. The eurozone PMI was not expected to fall as low as 47.2 from 48.8, and after a month of increase from August to September the US PMI fell again to 50.8 in October from 51.6.

The euro continued its rapid reversal last night sending the US dollar index up another 1% to 77.30. The Aussie took on board the rate cut as well as the stronger greenback to fall 1.8 cents to US$1.0344. Torn between the stronger dollar and reignited risk, gold was basically steady at US$1719.50/oz.

It is a rare session when aluminium is amongst the biggest losers on the LME, but on renewed fears and weak PMIs it fell 4.5%, beaten only by nickel's 5% fall. Copper fell 3%. West Texas crude dropped US$1.44 to US$91.75/bbl but Brent remained steady at US$109.54/bbl.

Investors again piled into US Treasuries sending the ten-year yield down another 14 basis points to 1.99%. In less than a month that yield has seen 1.7%, 2.4% and 2.0% again. That's up 40% and down 17% in price terms, and you think stock markets have been volatile.

Speaking of volatility, only last week the VIX was sitting at a comfortable 25. Last night it closed at 35.

The SPI Overnight fell 61 points or 1.4%.

Oh and just in case we didn't have enough bad news, the fallout over the MF Global bankruptcy continues. There is now a suggestion MFG's sour investments were not funded only by retained earnings but by client deposits as well. There has been accusation and denial from either side, but if true then a lot more people are going to lose at lot more money.

Aside from the Fed meeting tonight Wall Street will also learn the ADP private sector jobs number for October, and locally Westpac ((WBC)) will release its full-year result today and Woolworths ((WOW)) will hold a Strategy Day.  

Has Papandreou lost the plot or does he simply feel it is his democratic duty as representative of the Greek people to provide them with a choice? Whatever the answer, he sure isn't helping. 

Rudi will make his appearance on Switzer TV (Sky Business, 7-8pm) tonight and not yesterday as previously reported.

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