Greece contagion sweeps euro zone bond markets, hits shares

Mon Jun 15, 2015 7:15am EDT Related: GREECE

LONDON | BY NIGEL STEPHENSON

Reuters

Global financial markets suffered their first bout of significant contagion from the Greek crisis this year on Monday after 11th hour talks between the near bankrupt country and its creditors collapsed.

After weeks of minor ebbs and flows on the stop-start negotiations, bond markets across the euro zone signaled alarm that a deal may not be reached by mid-year, when Athens must repay 1.6 billion euros ($1.8 billion) to the International Monetary Fund.

The premium investors demand to hold Spanish, Italian and Portuguese government bonds over low-risk German Bunds hit 2015 highs, with the 10-year yield gap between Spanish and German debt at its widest since August.

Shares in Europe and Asia fell, led lower by banks.

The euro weakened against the dollar, pressured also by investor anxiety ahead of a U.S. Federal Reserve interest rate-setting meeting later this week.

U.S. stock index futures ESc1 were down 0.4 percent, suggesting Wall Street would extend Friday's declines, which were blamed on worries over Greece and the Fed meeting.

Talks on Sunday between Greece and its creditors, described as a "last attempt" to bridge their differences, broke up after less than an hour.

European Union officials said Athens had offered no new concessions to secure the funding it needs. Athens said it would not give in to demands for more pension and wage cuts.

Greece has already been bailed out twice and many banks have cut their exposure to the country while euro zone authorities have put in place mechanisms to limit contagion. However, the prospect of default and the possibility of Athens leaving the euro weighed heavily on sentiment on Monday.

"It's clear that each day that passes we come closer to a potential Greek default and this risk aversion is a natural reaction by the market," said KBC strategist Mathias van der Jeugt.

The pan-European FTSEurofirst 300 .FTEU3 stock index fell 1 percent and a gauge of European stock market volatility .V2TX hit its highest since Jan. 22, days before the left-wing Syriza party of Greek Prime Minister Alexis Tsipras won power in a parliamentary election.

Banks in Spain, Italy and Portugal were among the big losers, with Italy's Banco Monte dei Paschi (BMPS.MI) down 4.1 percent and Spain's Banco Popular (POP.MC) and Portuguese Millennium bcp (BCP.LS) both down 3.8 percent.

Athens stocks fell 4.4 percent while the exporter-heavy German DAX index .GDAXI lost 1.5 percent.

"Sentiment remains negative with rallies likely to be sold until there is some positive news (on Greece)," said Peregrine & Black senior sales trader Markus Huber.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS dropped 0.9 percent. Tokyo's Nikkei 225 .N225 index fell 0.1 percent, with traders citing concern over Greece and the Fed meeting, which ends on Wednesday.

Solid U.S. data last week reinforced expectations that the Fed is on track to raise rates, possibly as soon as September. Investors will focus on any changes in Fed Chair Janet Yellen's language in a post-meeting news conference.

EURO DOWN

The euro was down 0.3 percent at $1.1222, recovering from a low of $1.1188. Euro/dollar one-month volatility, a gauge of how sharp swings in the exchange rate are expected to be, hit its highest for 3-1/2 years.

Euro weakness helped push the dollar 0.3 percent higher against a basket of major currencies .DXY.

The yen was down 0.2 percent at 123.60 per dollar.

Safe-haven German 10-year bond yields fell 2.3 basis points to 0.82 percent while yields on both Italian and Spanish 10-year bonds rose more than 11 bps. Greek 10-year yields rose 92 bps to 12.75 percent, still a percentage point below late-April peaks.

Oil and gold fell as the dollar firmed. Brent crude LCOc1 lost $1 a barrel to $62.84. Gold fell half a percent to $1,175.26 an ounce.

(Additonal reporting by Jamie McGeever, Emelia Sithole-Matarise and Sudip Kar-Gupta in London, Lisa Twaronite in Tokyo; editing by John Stonestreet)