European woes shake markets

Countryman

Global share markets have continued to fall this week, once again succumbing to European concerns.

The Australian stockmarket has fallen roughly 10 per cent in the space of two weeks with many companies suffering far greater declines.

The focus continues to be on Greece after its May 6 elections failed to deliver a conclusive outcome.

There is support within Greece for the removal of its spending cuts (austerity measures) and the resumption of debt funding to the nation.

The fear for global markets centres around the unknown - how much is owed by Greece and to whom - and the fallout if Greece 'hard exits' from the European Union. This uncertainty and risk is driving down sharemarkets.

Adding further to the complications, there is no legal precedent set for Greece to exit the EU - countries that joined the EU signed irrevocably that they would not be able to leave it - and this is proving problematic for the region in understanding the potential fallout should Greece exit.

As it stands, Greece will now hold new elections on June 17, about which time the country will essentially run out of money without external funding assistance. These elections will effectively be a referendum on whether voters want Greece to stay in the eurozone - and continue down the path of austerity in return for bailout payments - or exit it.

The latter has investors nervous, particularly in light of the growing popularity of anti-austerity parties, which received strong voter backing in the first Greek election.

A Greek exit (or 'Grexit') from the eurozone would push it towards bankruptcy, which could have some nasty consequences for those investors - both countries and private organisations such as banks - that have lent Greece money.

This, in turn, could greatly destabilise share markets and the global financial system.

While we believe a Greek default is not Europe's preferred outcome and there is sufficient incentive to avoid (or at least delay) this outcome, we shouldn't simply assume everything will be all right.

At the end of the day, Greek voters will decide.

Following on from the past two weeks of bank reports, on the home front the Commonwealth Bank of Australia (CBA) announced its profit report this week and missed expectations.

CBA's cash profit rose 3 per cent to $1.75 billion in the three months ended March 31, from $1.7 billion a year earlier, putting CBA on track for record first-half cash earnings.

However, the result came in below the $1.8 billion analysts were expecting and was down 2 per cent from the previous quarter.

In the first half of the current fiscal year, Australia's biggest bank by market value reported a record $3.58 billion in cash earnings, despite ongoing pressure from high funding costs and slowing credit growth.

Macquarie analysts were unimpressed by the result.

They kept their "underperform" rating on the company's shares, saying the results showed a lack of momentum in earnings growth and did not justify the premium for CBA's shares relative to the bank's peers.

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_Information contained in this article does not consider your personal circumstances. You should consult a stockbroking professional before making any investment decisions. Sentinel may hold positions in stocks discussed from time to time. _

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