US stocks added to a global selloff yesterday as Greece veered towards a default on its debt, while the euro recovered from early sharp loss to turn higher against the dollar.
Greece will not pay a €1.6 billon loan instalment due theInternational Monetary Fund today, a Greek government official told Reuters.
Talks between Athens and its creditors broke down over the weekend after Prime Minister Alexis Tsipras called a surprise referendum on the austerity cuts in an aid package proposed by Greece’s creditors. Tsipras late on Sunday announced moves to prevent a collapse of the banking system.
European stocks closed near their session low but the euro recovered from a drop of as much as 1.9 per cent to trade positive against the dollar. The CBOE Volatility index, a measure of the premium traders are willing to pay for protection against a drop in the S&P 500, jumped as much as 24.6 per cent to 17.47 points, the highest since early February. It was last up 24.2 per cent at 17.41.
“It is hard to come up with what the percentage stock decrease should be to account for what outcome,” said Paul Zemsky, chief investment officer, Multi-Asset Strategies and Solutions, at Voya Investment Management in New York. “Global contagion doesn’t seem as likely,” he said, although he added that it often occurs on links unseen. Until late last week, investors were hopeful that an 11th-hour deal would prevent a Greek default and that the impact on other markets from a possible default would be minimal.
In afternoon trading, the Dow Jones industrial average was off 223.82 points, or 1.25 per cent, to 17,722.86, the S&P 500 lost 27.76 points, or 1.32 per cent, to 2,073.73 and the Nasdaq Composite dropped 74.88 points, or 1.47 per cent, to 5,005.63. The pan-European FTSEurofirst 300 index fell 2.8 per cent, the most in more than eight months. The index had fallen as much as 3.2 per cent.
Greek banks and the stock market were closed yesterday and were expected to remain closed until after the July 5 referendum. The planned vote would decide whether to accept stronger austerity measures demanded by Athens’s creditors.
The Global X FTSE Greece exchange-traded fund, which tracks the Athens stock market, was down 16.3 per cent. Eurozone banks fell 5.8 per cent. Adding to the gloomy backdrop, China shares continued to slide, with central bank cuts in interest and reserve rates on Saturday failing to calm jittery investors. The Shanghai Composite fell 3.3 per cent, bringing the losses in the past two weeks to more than 21 per cent. Hong Kong’s Hang Seng fell 2.6 per cent on the day.
The euro fell overnight to as low as $1.0953, off 1.9 per cent versus the US currency, but reversed near the mid-session in New York to trade up 0.4 per cent at $1.1209.
The euro drew added support as the Swiss National Bank confirmed it had intervened to counter gains for the franc against the bloc’s single currency.
The yen strengthened 1.1 per cent versus the greenback.
Despite the declines in the dollar, Greek fallout in the United States was not expected to be enough to throw the Federal Reserve’s likely September rate hike off course.
Benchmark US Treasury yields fell to one-week lows on Monday, with some traders flocking to US debt as a risk-off move on worries about the global impact of a Greek default.