In the recent two months, stock markets from all over the world have declined more as compared to rise. The main reason for this is because of the current Greece crisis.
By right, it is normal if the index in the stock market has a range of around 10%. A dip of less than 20% is considered a “market correction” and not a “reversal of trend”. In the recent two months, stock markets fell and this has caused quite a lot of people to feel a bit terrified. We could possibility say that majority of the people focus only on the recent happenings and the recent short term view of the market and did not carry out a long term analysis of whether the trend is still there.
Greece: Possibility of retracement in the markets
US plays a very important role in the global economy. At present, 23% of the global economy comes from the US while the “emerging” China only has 10% of the global economy. As such, if we are to analyse the trend of global stock market, we cannot neglect to research and analyse the US stock market. As long as Dow Jones Industrial Average (DJIA) did not break the psychological barrier of 11,600 points, the US stock market can still be considered as a bull market.
The psychological barrier of Singapore’s Straits Times Index (STI) is at 3,000 points which the psychological barrier of Shanghai Stock Exchange Composite (SSE Composite) is at 2,600 points.
Because of this, if the decline of the stock markets for the past two months were due to “market correction” and not due to “trend reversal”, the likelihood of a market retracement will happen quite soon.
Greece: Prepare for exit
However, if stock markets continue to dip and break the above mentioned psychological barrier, we will have to act according to circumstances and prepare to exit the market. It is because that if there is a trend reversal from a bull market to a bear market, there is a possibility that the market will drop between 30% to 50%.
STI may dip to 1,600 points during a crisis while DJIA may fall to 7,000 points. SSE Composite may also dip to around 1,800 points. As such, comparing the recent decline to that of the crisis, a decline of 10% is just a small movement and we should not be alarmed.
Greece: US economy will not be threatened by Greece
Many people might not know that, despite the Greece economy is smaller than Thai economy, it is bigger than Singapore’s economy. Last year, Greece’s GDP was USD 305.4 billion and it is ranked 32 of the global economy. Comparing this, Singapore’s GDP was only USD 222.7, which is ranked 39. Greece economy only covers 0.45% of the world’s economy and the goods import is only USD 2.5 billion, which is just 0.017% of US economy. Therefore, recently the ex-Fed chairman Alan Greenspan, said that the possibility of the Greece crisis affecting the US economy is sheer nonsense.
Greece will need help again and European Union will help Greece in the end. However, European Union will need Greece to reduce their expenses.
Greece: European Union’s greatest worry
Although Greece, Ireland and Portugal are in financial crisis, the economies of these countries are still considered “small”.
Recently, Spain’s jobless rate has hit 20%, GDP is at USD 1.4 trillion and Spain is ranked number 4 on European Union, 12 on global economy. Italy’s jobless rate is at 8%, GDP at USD 2 trillion, ranked number 3 on European Union and 8 on global economy.
The combination of the GDP of Spain and Italy is at USD 3.4 trillion and they have 20% share in the European Union’s economy and 5.4% share of the global economy. As such, European Union’s greatest worry is not Greece, but Spain and Italy. Especially, some countries in Europe have taken a loan from these two countries, hence there is a possibility that these two countries might be faced with a challenging situation.
Once “anything happen” to Spain and Italy, European Union may crumble because the strongest country and second strongest country of European Union, namely Germany and France respectively, will not be able to save Italy and Spain. Therefore, European Union should not worry about Greece.