Greek political turmoil sends equity markets tumbling

The FTSE 100 endured its worst trading session for one month on Tuesday as investors exited risky asset classes such as banking and mining stocks after Greece’s Prime Minister Mr Papandreou surprisingly called a referendum on the latest Greek bailout plans, putting the country’s solvency under immediate threat.

The move by the Greek PM was a shock, not just to investors but also it seems to European leaders and members of his own government, which does not bode well for party unity but also the sense that investors can predict how the situation will play out.

The key here is that merely one week after a hugely symbolic EU Summit at Brussels where multiple measures were announced to contain a Greek debt fallout, it seems that we could be back to square one, facing a Greek bankruptcy and potential exit out of the Euro zone. What’s more, with multiple Greek lawmakers dissenting against their own ruling party today alongside opposition figures and calling for snap general elections, an already weak Greek government has seemingly weakened further to the point where it could soon lose its grip on power. This further destabilises an already uncertain region, from which much of Europe’s debt woes originate.

The fact that the people of Greece will decide on the previously agreed bailout package means that, considering the public antipathy and anger towards the various austerity measures previously announced, it raises the potential for a ‘no’ vote and as such escalates an incredible amount of market uncertainty.

Investors hate uncertainty and the reaction today has been a pure example of this fact, with investors moving to downsize investments in risky stocks.

It now seems that the Greek referendum could take centre stage at the week’s G20 meeting in Cannes and can provide a rather unwelcome blind side to the crux of the issues investors were hoping the G20 summit would resolve. Announcements out of Germany and France today have indicated that both Angela Merkel and Nicolas Sarkozy will attempt to address the developing referendum issue with the Greek PM before the G20, and a cabinet meeting in Greece this evening could yet unearth more developments in the rapidly changing situation.

In addition to this, there are well entrenched concerns regarding Italy, and moves in the bond markets show just how highly investors are worrying over the reliance upon Italy to pay its creditors. Italian 10-year bond yields raced to new highs today of 6.366%, whilst in the same breath German 10-year bund yields, rapidly being seen as a safety net by investors, hit their lowest point in 6 weeks at 1.736%.

Risky asset classes such as banking, insurance and mining stocks were the harshest sold off, with Barclays, RBS and Xstrata shares the top three fallers in FTSE 100 trade on the day, losing between 7% and 10%. Man Group, the hedge fund, saw its shares hit its lowest point since 2003, whilst Aviva and IAG also saw significant losses on the day.

It’s been very much a risk off day but the fact that the FTSE 100 was able to stage a mini recovery in the afternoon session and close back above the technical support level of 5380 helps breed some muted confidence. That said, confidence is fragile at best, a fact emphasised by a 25% jump in the FTSE Volatility Index, a key gauge of investor fear and pessimism, and so the risk off theme seen this week has the potential to escalate as we head into the G20 meeting later this week if the uncertainty over Greece rambles on.

UK GDP grows 0.5% in Q3 but manufacturing contracts
Data from the Office of National Statistics (ONS) showed that the UK grew somewhat stronger than expected in the third quarter, by 0.5% from a previous quarter’s growth of 0.1%. Whilst the bounce in Q3 was better than expected, the expectations were already in place for a rebound in growth after the ONS had said that the second quarter was pressured by exceptional factors.

That said, data also out this morning showed that UK manufacturing contracted last month and fell at its sharpest rate since June 2009, with new orders at the lowest levels since March 2009. As such, the Q3 bounce in growth is being seen as merely just that, a bounce from a stagnate second quarter and in real terms this may mean that the UK is still in anaemic growth territory at the very best.