MarketView for November 1

Summary

Share prices were pummeled again on Tuesday as investors were blindsided by a surprise call for a Greek referendum on an EU bailout plan. The S&P 500 index is down more than 5 percent so far this week in moves reminiscent of the stomach-churning market swings seen over the past two months and this after everyone thought the worst of the euro zone debt crisis was over. Moreover, the S&P 500 traded below its 14-day moving average for the first time since October 7, pointing to a possible shift in short-term momentum. The benchmark also broke through support at 1,220.

So what will happen if Greek voters reject the unpopular bailout in a vote proposed by Greek Premier George Papandreou. Most likely it would result in a "hard default" by Greece, causing extensive losses for banks and raising the threat of systemic risk, in other words a mini Lehman Bros.

The news slammed European stocks, particularly the region's banks, which saw their share prices lose in the neighborhood of 6 percent. U.S. banks were also hit hard. Morgan Stanley, which has heavy exposure to Europe, fell 8 percent to $16.23.

Indexes swung sharply as successive European lawmakers lined up behind the bailout package but returned to close near session lows after a Greek government spokesman said the prime minister told his cabinet the referendum would go ahead.

The selloff came on sharp spike in volume with 10.3 billion shares traded on the major equity exchanges, about a 22 percent increase above the 20-day moving average, while the CBOE volatility index jumped 16 percent to 34.77, its highest since around mid-October.

Adding to the gloom, factory activity in Asia's big export economies slowed to the weakest rate in nearly three years in October, while UK manufacturing suffered a sharp decline, reigniting fears of a global slowdown.

Economic data showed the pace of growth within the U.S. manufacturing sector slowed in October, though improvement in new orders suggested some degree of resiliency.

In a move that put further pressure on commodity prices, Japan vowed to step into foreign exchange markets again. The government sold a record $98.7 billion on Monday in yen to curb its strength, which is hurting Japan's export-based economy.

Oil futures settled at $92.19 a decline of 1.07, and copper prices fell 3 percent. Many commodities are priced in dollars, making a rise in dollar more expensive for traders in other currencies, while at the same time reducing demand.

And the Grecian Merry-go-Round Continues

Greek Prime Minister George Papandreou said on Wednesday he would push ahead with a referendum on an EU bailout deal, defying demands from lawmakers of his own party that he quit jeopardizing Greek membership in the European Union.

"The referendum will be a clear mandate and a clear message in and outside Greece on our European course and participation in the euro," Papandreou told a late-night cabinet meeting, according to a statement released by his office.

"No one will be able to doubt Greece's course within the euro," he said, adding that market turmoil triggered by his announcement of the referendum late on Monday would be short-lived.

The euro and global stocks were pummeled on Tuesday after Papandreou's move threw into question the survival of crucial efforts to contain the euro zone's sovereign debt crisis. The leaders of France and Germany, caught unawares by Papandreou's high-stakes gamble, summoned him to crisis talks in Cannes on Wednesday to push, before a summit of the G20 major world economies, for quick implementation of the bailout deal.

But Papandreou said Greece's partners would support its policies and urged the G20 meeting to agree policies that "make sure democracy is above market appetites."

Papandreou’s most immediate hurdle is a confidence vote on Friday. He told the cabinet he believed he would both win the vote and hold the referendum as planned.

During a cabinet meeting that lasted over 5 hours, some ministers backed Papandreou's decision, others questioned the timing of the referendum and criticized the fact they had been kept in the dark, and a handful were openly against it, government sources said.

Papandreou needs 151 votes to enact the referendum. If any of the dissenters votes against, it cannot be held.

European bank shares fell sharply on fears of a disorderly Greek default and the Athens Stock Exchange suffered its biggest daily drop since October 2008, with the general index shedding 7.7 percent. The risk premium on Italian bonds over safe-haven German Bunds hit a euro-lifetime high on Tuesday, raising Rome's borrowing costs to levels that proved unsustainable for Ireland and Portugal.

Greece is due to receive an 8 billion-euro IMF/EU aid tranche in mid-November, but that is likely to run out during January, around the time of the referendum, leaving the government with no funds if there is a "no" vote.

The renewed uncertainty is bound to embarrass G20 host Sarkozy as he tries to coax China into throwing the euro zone a financial lifeline. It could also further undermine dwindling political support in northern Europe for aiding Greece. The chairman of euro zone finance ministers, Jean-Claude Juncker, said Greece could go bankrupt if voters rejected the bailout package.

Papandreou said he needed wider backing for the budget cuts and structural reforms demanded by international lenders.

But the conservative opposition said an election was a "national necessity."

Banks exposed to Greece and Europe's bigger, troubled economies, suffered most. Shares in France's Societe Generale tumbled 17 percent and Credit Agricole was down almost 12.5 percent.

A man used to popularity and acclaim even when his party languished in opinion polls, Papandreou may have found the public acrimony following from his austerity measures a bitter pill to swallow. He has looked increasingly isolated, attended by a dwindling group of close aides.

Last month, Papandreou was forced to expel a former minister and family friend from the party group for voting against part of the austerity bill, reducing his parliament majority to 153 out of 300 seats.

Political analysts were baffled by the referendum move they saw as an elaborate way to fall on one's sword. With socialist deputies demanding a snap election or Papandreou's resignation, it seems likely the country will head to the polls before any referendum.

Those close to Papandreou said the announcement may have been sudden, but the decision was long in the works.

Aides say Papandreou has been shocked by the deep corruption and special interests that dominate Greek society and has felt isolated from many in his party, still dominated by the populist ideas of his late father, the socialist maverick.

With key bills like a tax reform and the 2012 budget ahead, demands from MPs for Papandreou to try to share the burden with other parties could no longer be ignored.

He broke the referendum news at the end of a long speech to his parliamentary group late on Monday.