THE Straits Times Index (STI) lost 104 points or 3.6 per cent this week to end at 2,779.10 yesterday not only because European contagion fears intensified following the recent election results in Greece but also because of earnings disappointments reported by a few of the market's leading companies.

Of this loss, 43.51 points came yesterday when relatively low volume of two billion units worth $1.4 billion excluding foreign currency issues were traded.

Stock charts

Blue chips which collapsed the most during the week included those in the Jardine group and those from the commodities sector and the banks. Penny stock or microcap activity, which a couple of weeks ago dominated trading, dried up for the second week running.

Earnings disappointments played a big part. The standout sector in this regard was commodities, where the triumvirate of Olam, Wilmar and Noble have been battered following the announcement of large earnings drops. Over the week, Olam lost 34 cents or 16 per cent to $1.73, Wilmar 35 cents or 8.5 per cent to $3.79 and Noble 7.5 cents or 6.5 per cent to $1.085.

Notwithstanding the barrage of "sell" reports that have been issued on Olam, Macquarie Equities Research said this week it is maintaining its "outperform" on the stock with a 12-month price target of $2.80. It said the price catalyst for the stock is likely to come from Olam's Q1 2013 results, usually reported in November.

Over in the microcap segment, volume all but disappeared. A fortnight ago the unit daily average was 16 cents but this week the figure regularly crossed 70 cents with yesterday's average coming in at around 70 cents. Market leaders such as JEL, MDR, TT International, Ipco and Vizbranz, all of which had come to life in April and early May, have suffered a sharp withdrawal of volume.

The main fear circulating in equity markets is of a default by Greece leading the country to exit the eurozone, which if it occurs could see pressure spread to other indebted nations such as Spain, Italy, Portugal and Ireland. These fears have grown this week after Greece's political parties, most of whom are against the austerity measures imposed by main bailor Germany, were unable to form a coalition government. The worry is that without bailout money, Greece would default on its debt and throw the eurozone into disarray.

In its latest Developed Europe Economics report titled "What if Greece exits the euro?", Bank of America-Merrill Lynch said that because the implications of a Greek default are so profound, policy-makers would probably go a long way to prevent it from happening.

"According to IMF figures, in the event of an exit, Greek GDP could contract by as much as 10 per cent in year one," said BoA-ML.

"For the eurozone, we assume that a forceful set of policy measures would be implemented but they would nevertheless result in elevated costs. Greek assets of about 450 billion euros could also be at risk of significant losses in the immediate aftermath of a euro exit. In addition, a Greek exit could spill over to other countries resulting in deposit flights threatening the stability of banking sectors and destabilising sovereign bond markets. As policy-makers assess the effect of Greece leaving the euro, the high costs and risk of contagion will, in our view, raise the impetus to keep Greece in."