Search ForexCrunch

While headlines throughout financial publications over the last two weeks have been squarely focused on monetary policy decisions of central banks and how they will shape the global economic landscape, political uncertainty in Greece was back on the agenda over the weekend, with the outcome of the elections garnering the attention of financial market participants.   Not surprisingly, the anti-austerity party Syriza managed to come out on top in accordance with polling leading up to the election; however, the ability of Syriza to come just shy of a super-majority to capture 149 seats of the 300 seat parliament did ruffle some feathers, along with the time it took for Syriza to reach a coalition (in principle) with the radical right wing Independent Greeks.   While Prime Minister-elect Tsipras will still be in discussions with other parties on forming a coalition, the initial reports illustrate a new government will be sworn in quickly, to then be faced with the task of negotiating with Greece’s creditors before the current support package runs out.

Recent assertions from Tsipras and the Syriza party suggest yesterday’s victory is to be seen as a vote for anti-austerity as opposed to anti-EMU and a “Grexit”, though the near-term risks for the Greek financial system and broader financial markets will be the upcoming negotiations with the “Troika”, especially if the coalition government is formed with the Independent Geeks who are aligned in their anti-austerity policies.   If a new support package agreement can’t be hammered out before the February extension deadline, the funding of Greek banks becomes questionable as the ECB won’t accept Greek bonds as collateral, making it difficult to roll the large debt repayments scheduled for 2015.   With Syriza’s reputation and election platform built on easing austerity, the best situation for financial markets will be that both sides (Syriza and the troika of Greek lenders) concede just enough ground the save face, though one would expect a more tumultuous bout of negotiations as each side provides little in the way of initial concessions.

The initial reaction in financial markets to the Syriza landslide victory was one of pessimistic “risk-off”, with EURUSD threatening to break below the 1.11 level, while S&P futures slid by 15pts.   After the dust settled, reports of a coalition government in Greece forming relatively soon has helped ease some tensions, with EURUSD recovering all of its overnight flush to regain the 1.12 handle with conviction.   Sentiment throughout global equity markets has also made a sharp U-turn, aided by a better than expected survey from the Ifo Institute on German business climate, mirroring the optimistic ZEW numbers registered last week.   Estimates had been for January’s number to print at 106.3, yet the reading of 106.7 not only beat expectations to the topside, but also came in above the 105.5 registered in December.

Despite the potential for the political situation in Greece to create another avenue for heightened volatility in financial markets, the majority of the major equity bourses in Europe are well situated in the green, with the tape on S&P futures only moderately negative before the opening bell in North America.   The loonie’s struggles continue as the aftershocks of last week’s surprise BoC interest rate cut continue to reverberate through currency markets, with the commodity-linked currency pivoting in the mid-1.24s as the hydrocarbon complex fails to make any great strides of strength.   Although OPEC’s secretary general was reported as saying oil prices have bottomed and will rebound soon, the comments are just beginning to seep through into crude’s price action, with front-month WTI changing hands above $46/barrel; but the real question will be whether this is a change in tone and sentiment, as opposed to a fleeting bout of short-covering.

Further reading:

Stay Short EUR/USD targeting 1.1050, then 1.0765 – Barclays Trade Of The Week

Australian dollar headed for further falls