LOW-priced issues enjoyed a bit of rotational action yesterday but all this ceased once Europe opened in the late afternoon in the red following a selloff in Spanish and Italian bonds that led to a 13.07-point loss for the Straits Times Index (STI) at 2,773.81.
On top of this, there are concerns that Greece this weekend will elect the same parties as six weeks ago, which could in turn cast doubt on the country's membership in the eurozone.
"Everyone is waiting to see what Greece does," said a dealer, summing up the caution that has infused sentiment ever since the first round of Greek elections six weeks ago which was won by anti-austerity parties, a victory that has threatened Greece's continued receipt of bailout money.
Apart from Greece, investors are also watching Spain and Italy. Moody's Investors has downgraded Spain's sovereign debt from A3 to Baa3, saying that the 100 billion euro (S$161.3 billion) bank bailout announced last weekend by eurozone leaders for Spain's troubled financial sector will add to the government's debt burden.
As a result, the Spanish 10-year yield yesterday jumped 15 basis points to a record 6.86 per cent in early European trading yesterday. The 10-year Italian yield has also been climbing and was around 6.3 per cent yesterday.
Activity here was therefore muted, with a weak 1.2 billion units worth $782 million excluding foreign currency issues traded.
The unit average was 64 cents and penny stocks which showed a spark of life included MDR at one cent, Next-Gen Satellite Comm at 1.1 cents, United Fiber at 5.6 cents and Teledata at 0.9 cent.
In its June 13 Liquid Insight, Bank of America-Merrill Lynch (BoA-ML) looked at the possible outcomes of Greece's elections.
"If the New Democracy party wins, markets are likely to react positively," said BoA-ML.
"Although this is the same outcome as in the last election, markets are more worried about Syriza winning. The negotiations to form a government will not be easy, but we expect them to be successful. The pressure to form a government will be much stronger this time, as we do not believe that the country could afford another election (according to our analysis we expect the Greek government to run out of money by end June, or early July) . . . If Syriza wins, we expect markets to initially react negatively. Uncertainty about the prospects of the Greek programme is likely to increase substantially. Syriza has been threatening to stop the programme. Markets well beyond Greece could be in turmoil, waiting for clarity".
In Schroders' Private Banking's June Investment Outlook, head of asset allocation Robert Farago said that investors now are faced with the uncomfortable combination of extremely oversold markets and a number of signals telling them it is right to panic.
"This leaves us poised for a rapid rebound if anything is done to restore confidence but vulnerable to accelerating downside if authorities remain on the sidelines," wrote Mr Farago. "Politics will determine where we go next."
He added that although Greece's elections will provide the initial flashpoint, beyond that the key decisions lie with Germany as the major creditor nation within the currency union and the outcome is almost impossible to predict.