Shane Oliver, AMP Capital Investors Ltd.’s Sydney-based head of investment strategy, comments on today’s declines on Australia’s S&P/ASX 200 Index.
The gauge fell as much as 1.9 percent today, led by financial stocks after Fitch Ratings cut Greece’s credit rating and Standard & Poor’s said Italy’s was at risk, deepening concern over Europe’s sovereign debt crisis.
On European debt problems:
“Basically, investors are fearful that a default by Greece will adversely affect global banks that have exposure to Greek debt, thereby pushing up the cost of funding for Australian banks.
“More broadly, there is concern that Europe’s failure to get control of its sovereign debt problems will ultimately threaten European and hence global growth overall, which in turn will affect demand for Asian exports and ultimately demand for Australian commodities.
“After the poor showing of Spain’s governing party at weekend elections and S&P’s downgrade to Italy’s credit rating outlook, there is the added concern that the ‘firewall’ that has so far protected Spain and Italy might break down, leading to investors starting to worry about those two much larger countries.”
On the Australian stock impact:
“The adverse reaction in the Australian markets might have been magnified because the latest European debt problems are occurring at a time when the worry list for investors is now very long, and includes the ending of QE2 in the US, soft recent U.S. growth data, talk of ECB tightening, the return to recession in Japan, worries about a hard landing in China, and the two-speed economy and talk of more rate hikes in Australia.
“And now there’s even another volcano in Iceland potentially threatening air travel again. All this is making investors very twitchy.”
On the global recovery:
“Ultimately, I think the global recovery will continue and this will underpin gains in shares by year end, but in the interim it could be a bit rough.”