World Markets Worried About Sovereign Debt Crisis

“Voted the best people-watching spot in Hong Kong.”

There you have it, emblazoned on the back of the waitresses’ dark blue, button down shirts. And who are we to argue? Certainly, from our perch here on the corner of Staunton and Shelley, a few feet away from the world’s longest escalator, the view is an interesting one.

We wonder what these passers-by are thinking…

A rough looking man, perhaps of Middle-Eastern descent, ambles along the narrow sidewalk. He is unkempt and carries on his shoulders a tattered rucksack full of who-knows-what. A group of Asian schoolgirls, dressed in white blouses and pleated skirts, cross the street when they see him approaching. Hurtling along the winding thoroughfare, a red cab threatens for a moment to swipe the stragglers off their feet. They giggle to each other as they bound up the curb, casting a second glance back at our wanderer. If he has noticed anything at all, his expression doesn’t reveal it. He just continues along his way, on and on, up the hill…

A trendy young couple takes a seat at the front of the restaurant. He wears his collar turned up and flashes a toothpaste-advertisement grin. His legs are shaved. Maybe he’s a cyclist? Or a swimmer? Wait…no…now he’s smoking. Well, who knows? She is a petite Asian beauty with slightly darker skin, perhaps from the Philippines or Malaysia. Her body language is confident, but for the briefest moment we catch an almost imperceptible sadness in her eyes. Then, in a flash, it’s gone. The waiter arrives with the couple’s drinks. They raise their glasses, looking pleased with themselves, more or less…

Another rambler, a Sikh wearing a football jersey and a Dastar, passes by the window. And there goes a young woman, a European foreigner, perhaps, walking behind a hundred dogs. Did she come here to walk other people’s pets? We can’t say for sure. Times are tough. And here, in walks another young lady, this one with her parents in tow. She directs them to a table opposite the counter, throwing a warm, familiar wave to the handsome Nepalese barkeep. She’s been here before. Her folks, with shirts tucked into their jeans, are most likely visiting. She looks at dad before ordering a glass of wine. He glances at mom and smiles. They look proud…

A kilometer or so down the hill, a few escalator stops away, the financial markets are selling off. The Hang Seng is down almost 2% so far today. Taiwan, South Korea, India, Indonesia are all down heavily, too. Australia’s markets, mostly resource driven, were under pressure early, off 1.3% when we checked a few moments ago. Miners there led the move to the downside for a second straight day, with BHP Billiton Ltd. slipping more than 4% in Sydney before we’d even had the chance to order a glass of wine and a few nibbles.

The general trend lower across the region echoes similar moves by markets in Europe and the US overnight. The S&P 500 slid 2.3% during yesterday’s trading, despite some enthusiastic hollerings out of the manufacturing sector. Major indexes were off for a third consecutive day in Europe. Bourses from the Thames to the Rhine and beyond were last seen languishing near their lows for the session.

Investors around the world have suddenly become wary of sovereign debt “contagion” in Europe. They’re worried that Greece’s financial woes might soon learn to speak Spanish…and Italian…and Portuguese. The problem, folks are coming to realize, is that government balance sheets are riddled with the hot potato debts of other government balance sheets. Dan Denning, filing his reckonings from his DR office in Melbourne, sent us this helpful little graphic, courtesy of The New York Times.

As the song goes, “the Greek bone’s connected to the…other bones” …or something like that. And now, with lenders pushing the cost of capital ever higher for the languishing Euro economies, the whole skeletal structure threatens to collapse into a pile of broken bones before too long. It’s not a new story, to be sure…just a convenient reason to sell. Sometimes, that’s all an overbought market standing atop a phony recovery needs to hit the skids.

Unsurprisingly, the euro continued its southbound trajectory today. Some, including Guy Wyser-Pratte, whose investment fund targets undervalued European equities, suggested the beleaguered currency could even hit parity with the greenback, something not seen since 2002. Currently it sits just under $1.30.

Meanwhile, Down Under, investors were clobbered again today after the government-commissioned Henry Tax Review recommended onerous tax increases on resource companies. More on that kerfuffle later in the week but, suffice to say, the Rudd administration looks bent on slaying the goose that mined Australia’s golden egg.

Joel Bowman
for The Daily Reckoning

The Daily Reckoning