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Extent of European market moves indicate real concern

10.05 AEDT, Tuesday 5 February 2013

Extent of European market moves indicate real concern
By Ric Spooner (Chief Market Analyst, CMC Markets)

For the first time this year, the local market opening will follow a significant decline in international markets. Allegations of improper payments to members of Spain’s governing party were the catalyst.

Last night’s developments create a dilemma for investors. On the one hand, they will be conscious of that this news comes after a protracted market rally. In these circumstances, bad news is always likely to trigger a sharp initial reaction as nervous traders rush to protect significant profits. In the longer term, investor action will be limited by the fact that the allegations are at this stage unproven. Even so, markets will monitor this situation closely over the coming days and weeks. If they have any substance, this type of political allegation tends to unfold over a period of time as the media and opposing political parties gradually uncover more facts.

On the other hand, until there is news putting this issue to rest, it is likely to be a source of concern to markets. Ultimately the possibility of a Spanish election could at this stage lead to significant destabilisation of the delicate Eurozone reform alliance. The implications of this risk are reflected in the size of moves in directly affected markets last night, with Spanish 10 year bond yields jumping 0.23% overnight.

The Reserve Bank is unlikely to cut rates or indicate a heightened easing bias today. A wait and see attitude seems likely given the improving international economic outlook, rising asset prices and higher iron ore prices. A decision along these lines is unlikely to have any impact on markets this afternoon.

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