Greek talks failure hits shares, buoys low-risk debt

Mon Jun 15, 2015 4:29am EDT Related: GREECE

LONDON | BY NIGEL STEPHENSON

Failure in the latest talks aimed at averting a Greek default hurt shares in Europe and Asia on Monday, drove investors into the safety of low-risk government bonds and weighed on the euro.

As contagion from the collapse of Sunday's talks spread across markets, the premium investors demand to hold Spanish 10-year bonds ES10YT=TWEB over German Bunds DE10YT=TWEB hit its highest since August.

"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 euro EUR= fell against the dollar, with the single currency also under pressure on investor caution before a U.S. interest rate-setting meeting later in the week.

Talks between Greece and its creditors broke up after less than an hour, raising prospects of Athens being unable to repay 1.6 billion euros ($1.8 billion dollars) owed to the International Monetary Fund by the end of this month.

European Union officials blamed Athens, saying it had not offered new concessions to secure the funding it needs. Athens said it would not give in to demands for more pension and wage cuts though Finance Minister Yanis Varoufakis ruled out Greece leaving the euro.

The pan-European FTSEurofirst 300 .FTEU3 stock index fell 0.8 percent. Athens stocks fell 6.2 percent while the exporter-heavy German DAX index .GDAXI lost 1.2 percent.

"There's been no progress on Greece, so I expect European stock markets will undergo further selling pressure in the near term," said Berkeley Futures' associate director Richard Griffiths.

Contagion also affected Asia. 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 Federal Reserve's two-day meeting, which ends on Wednesday.

Solid U.S. data last week reinforced expectations that the Fed is on track to raise rates for the first time since 2006, possibly as soon as September. Investors will focus on any changes in Fed Chair Janet Yellen's language in a post-meeting news conference.

U.S. stock index futures ESc1 were down 0.2 percent, suggesting Wall Street would extend Friday's declines.

The euro was down 0.3 percent at $1.1230, recovering from a low of $1.1188. Euro/dollar one-month volatility EUR1MO=, 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 index, which measures the greenback against a basket of currencies .DXY, 0.2 percent higher.

"We believe the market is underpricing the risks of increased volatility. We continue to recommend staying short euro/dollar," Barclays said in a note to clients.

The yen JPY= 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 IT10YT=TWEB and Spanish 10-year bonds ES10YT=TWEB rose some 8 bps. Greek 10-year yields GR10YT=TWEB rose 61 bps to 12.44 percent.

Oil prices edged higher. Brent crude LCOc1 rose 9 cents a barrel to $63.96. Gold XAU= held steady at $1,181.50 an ounce.

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