The Overnight Report: Savings Flee Greece

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By Greg Peel

The Dow closed down 63 points or 0.5% while the S&P fell 0.6% to 1330 and the Nasdaq lost 0.3%.

Greece will go back to the polls next month after last-chance talks between all political parties unsurprisingly failed to provide a coalition government last night. While the result was largely expected, it was still worth further falls in European stock markets over night and a wobbly start on Wall Street. The Dow did nevertheless manage to push to a 60 point gain after midday, as yet again the buyers countered general sentiment. But as has been the case these last few sessions, the momentum faded and prices began to fall once more.

As we moved into the last hour, a story hit the wires of a leaked transcript from party negotiations conducted earlier in the week. It is known that Greeks have been shifting their euros out of Greek banks but on Monday alone a total of E700m of deposits were withdrawn as cash and a further E100m redirected into safe haven instruments such as German bonds. With fresh elections a month away, Greece is beginning to see a run on the banks. Again, this is hardly a surprise. An exit from the eurozone throws up the possibility of a freeze on bank assets at some point, and ensures an exchange of euro holdings into significantly devalued drachmas.

Do the Greeks really want to leave the euro? The next poll will provide the answer. It would mean, however, a big reversal of the swing towards the now highly popular Syriza party and a swing back to the former coalition parties. Syriza has offered a panacea – staying in the euro while abandoning strict austerity. It will all come down to whether the Greeks realise such a pledge for what it is – Disneyland – and whether sufficient fear will build between now and the election over the consequences of a euro exit. No one's quite sure what those are, but there is little doubt it will not be enjoyable for the Greek people. The EU may help Greece out gradually, but the bail-out tap will soon be turned off. That will only leave the IMF to pick up the pieces.

The question for the rest of the world, for which no one yet has a definitive answer, is: will a Greek exit make the remaining eurozone more stable or less stable?

Meanwhile, money continues to flow into the US, with the US dollar index up another 0.7% to 81.26 last night. The inflows exactly mimick the movements of late 2008, when the world realised the “credit crunch” was not just a US but a global issue, and of 2010, when the European crisis really began to heat up. In both cases, the dollar rallies were very quickly nipped in the bud and rapidly reversed by the first two horsemen of the apocalypse – QE1 and QE2. It's now just a matter of when the third horseman gallops in. Don't get too excited about the Aussie, which is currently trading at US$0.9929.

With all eyes across the water, the subtext of a tenuous US recovery continues. The measure of US housing market sentiment has hit a five-year high this month, up to 29 from April's 24. There is a growing feeling the US housing market has bottomed and begun a timid turnaround. We recall that this is still a 50-neutral measure, nevertheless. The Empire State manufacturing index had plunged suddenly in April from a good reading in March, but the May reading shows a complete bounce-back – to 17.1 from 6.6.

Less inspiring was a mere 0.1% gain in retail sales in April, showing growth dropped sharply after the mild winter splurge. Lower gasoline prices were a factor, but ex-energy the increase was still only 0.2%. Consumer prices were net flat over the month. Once again we have a head-scratching selection of US data that fail to provide a clear picture in either direction.

Commodity price movements at present appear to be largely a reflection of the incremental US dollar rally rather than of any fundamental consideration, such that last night base metals were mostly softer again and gold fell another US$12.70 to US$1543.80/oz. West Texas crude fell US$1.52 to US$93.26/bbl but Brent, which is rolling over into the July delivery front month, rose US63c to US$111.45/bbl.

The US ten-year yield remained steady at 1.78% but the VIX continues to edge higher, towards 22.

Activity on the Australian market was subdued yesterday, with the ASX 200 pretty much closing where it opened. Volumes, like everywhere else in the world, are low. The RBA minutes did not provide much in the way of further inspiration, with the board suggesting the reason for the “double” cut was a response to the dislocation of bank lending rates and the cash rate, such that lending rates had actually risen post the November-December cuts. On that basis, said the RBA, a double-cut was needed. There was, unsurprisingly, no talk of “Omigod we've got this wrong!”

The SPI Overnight closed down 32 points or 0.8%.

Westpac will release the results of its monthly consumer sentiment survey today, while tonight the minutes of the last Fed meeting will be released to much scrutiny. CSR ((CSR)) will report its full year result today and Lend Lease ((LLC)) will hold an investor day.

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