How the Greek Downgrade Will Affect Markets
Standard & Poor's decision to downgrade both Greece and Portugal raised the prospect of the debt crisis spreading to other members of the euro zone and beyond.
It made stocks across the world plunge late Tuesday when it was announced, sending ripples through Asian markets Wednesday morning.
The yield on 2-year Greek bonds surged to 24.2 percent, while the spread between the Greek 10-year bond and German bunds rose to 847 basis points from Tuesday's 690 basis points.
The euro is managing to eke out a small gain and bond yields rose with the exception of the German bund, leaving investors across the world questioning what this crisis means for their investments.
The Greece stock market regulator banned short-selling in stocks on the Athens exchange until June 28.
Stocks – Uglier Still?
Until now, global stock markets have shrugged off the sovereign debt crisis facing Greece and the rest of the euro zone but Tuesday's downgrades of both Greek and Portuguese debt by S&P saw heavy selling.
"It is ugly and I suspect it is going to get uglier still," Dennis Gartman, the Founder of The Gartman Letter, told CNBC.
"There is confusion regarding euro zone and EU. Asset managers will be unwilling to put money into the euro zone as the contagion is spreading," Gartman added.
European stocks fell Wednesday morning, with financials the most affected. French banks have the biggest exposure to the Greek debt market, according to figures from the Bank of International Settlements.
In the US, if the Dow goes below 10730, we could see a pullback but gains will be made if the market holds this technical level over the coming days, according to Chris Zwermann, a technical analyst at Zwermann Financial.
The market's reaction to the S&P downgrades is "curious," Mark Tinker, global portfolio manager at Axa Framlington, said.
"We have known since the start of the year that Greece is in trouble but after a period of calm some in the market want a Greek debt restructuring because people want to make gains on credit default swaps contracts," he said.
Mark says it is not as easy as saying equities are selling off on this or that and believes there is a lot of action going on behind the scenes; news like the S&P downgrades are playing into this trading battle.
His advice is to get into Asian equities and industrial stocks where the growth is and avoid trying to be to smart on this story.
- Watch the full interview with Dennis Gartman above.
Currencies – Euro Even Lower
The euro is currently trading at a 12 month lows versus the dollar and while it is believed Germany is happy to see the single currency fall, a number of analysts are predicting it has far further to fall.
Steve Barrow, the Head of G10 research at Standard Bank says he is on the short side of the euro and not just against the dollar.
Hold the likes of the yen, the Australian dollar and Swedish krona, Barrow said. The euro zone crisis could also be good news for the UK pound, as it takes attention away from uncertainty surrounding the election, he added.
"The small bounce in the euro is not a major move," Gartman also said. "The trend is clearly downwards and people will continue to sell the euro and new lows will be hit later this week."
But others predict the euro will rebound. The dip below $1.32 was not as sharp a fall as some had expected, according to Chris Zwermann, the Global Strategist at Zwermann Financial.
"In my opinion if we break through $1.30 we could see a rally from here. Ultimately we could move towards 1.36 against the dollar," he predicts.
Bond Markets – Contagion Is the Whisper
Yields on Greek debt have spiked sharply in recent weeks and other members of the so-called PIIGS (Portugal, Ireland, Italy, Greece and Spain) are beginning to see their cost of borrowing rising while a flight to safety saw German bund yields fall sharply.
With America, Japan and the UK expected to issue billions onto the market every month this year, contagion is being whispered across the world.
The money pouring into the bund was a good sign, said Barrow, but he believes there could be a point when the German bond market begins to trade negatively on the debt crisis story.
If Germany had to start bailing out Portugal or Spain that trend could turn around given implication for German borrowing, he explained.
Big bets are being made on a Greek default in a similar way to how investors shorted the sub-prime market, Tinker believes.
Greek Debt Agency officials refused to comment.
Officials at the DTCC Trade Information Warehouse for credit derivatives did not respond to CNBC.com requests for information on outstanding credit default swaps on Greek debt and who owns them.
Ultimately, some in the market are pushing for a break-up of the euro zone and somewhere down the road we could see a return to some form of Exchange Rate Mechanism (the euro's waiting room, where any country that wishes to join the currency union must spend two years) or a managed float within the euro zone, Tinker said.
"The problems are clearly in the bond market and not in the equity market and sooner or later we are going to be facing haircut on Greek debt," Tinker added.
Political problems in Germany are much to blame for the situation said John Wraith, a fixed income strategist at BofA Merrill Lynch Global Research.
"We are into the realms where market sentiment overtakes fundamentals ... when push comes to shove big euro zone members are reticent about coming to the table to help. If S&P are warning investors will only get 30 or 40 percent of their money back then why would you give Greece and others the benefit of the doubt," Wraith said.
Gold – Smart Money Destination
With so much uncertainty surrounding the global equity market should investors be parking your cash in bullion?
"I don't like being bullish on gold but the smart money will head to this market," Gartman said. "Gold in euro and sterling terms is at record highs and people are trading out of equities into bullion."
Gold is fighting with the January high and the market will go a lot higher if we can break above that level, Zwermann said.