Both the single currency in particular and risk assets in general rose overnight in response to the Greek election outcome. There was always a decent prospect that enough Greek voters would use their common sense a second time around, and with risk aversion at an extreme, the potential for a decent short-covering rally was high.
The euro is now at 1.27 for the first time in four weeks, and from a technical perspective the price action looks encouraging. High-beta currencies such as the Aussie, for which the short base was also exceptionally high, have also jumped – the AUD is above 1.01, up 5% in the past three weeks. Not surprisingly, both the dollar and the yen have given back some ground whilst the pound has again underperformed. Video:
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Bond yields of both Italy and Spain are lower in early trading, whilst Bund yields are higher. It remains to be seen how long the relief lasts. Greece remains on a financial precipice, with the government essentially out of money, deposits fleeing the country and tax avoidance now an epidemic. Also, there are justifiable doubts over whether Greek politicians will be able to form a properly-functioning government, one able to actually implement the troika’s demands.
Commentary
Greek Armageddon on hold. New Democracy leader Samaras faces an enormous challenge over coming days to form a coalition government in Greece after his party won 129 seats of the 300-seat parliament. His first conversation with be with Pasok leader Venizelos, who gained 33 seats. Both leaders clearly understand the gravity of the situation: Greece has been without a fully-functioning government for over two months now and creditors are demanding the implementation of further austerity measures and reforms before releasing the next quarterly disbursement of bailout funds. Without this cash, the Greek government is expected to run out of money within four weeks and will be unable to pay civil servants’ wages and state pensions. Given what is at stake, all parties are likely to negotiate in great detail in order to secure their mandate for a coalition. Regardless of the outcome, there remains a sizable minority in Greece who have expressed their discontent with the current bailout deal. Even under the optimistic scenario of New Democracy forming a workable coalition in the coming days, there are tough times ahead. Furthermore, the New Democracy leader, Samaras, has made clear his intention to gain further concessions on the current bailout deal from the troika, such as measures to support growth. He needs to tread very carefully. Northern Europe is clearly exasperated with Greece, with many policy officials now minded to cut Greece loose.
BoJ keeps its powder dry. Tokyo will no doubt have been disappointed with the jump in the Japanese yen on Friday, mostly in response to the BoJ’s decision to stay its hand on additional monetary easing. Some commentators suspect that the Japanese central bank would have been prepared to inject fresh helicopters drops of liquidity alongside other major central banks should yesterday’s Greek election have delivered another outcome where a strong new government was rendered improbable. Also, with the BoE considering further QE, the Federal Reserve probably also contemplating additional asset purchases and the ECB examining more of those bazooka-esque LTROs, policy officials in Japan will recognise that the yen is attracting some additional short-term safe-haven flows that ordinarily may have gone into the dollar. Although there have been some of the regular protests from the usual suspects (Shirakawa and Nakao for instance), the MoF will be contemplating its options should USD/JPY near the critical 78 level again.
The uncertainty of sterling. Traders and investors are still digesting the numerous announcements made by the chancellor and the Bank of England governor on Thursday. In addition, there is the increased likelihood of further QE next month as well as the message contained in the most recent trade figures. On the latter, the April numbers showed the trade deficit at GBP 10.1bn, just shy of the largest in history. More than 70% of this deterioration was due to the non-EU balance so it can’t be blamed on the eurozone crisis. Exports to China were down 16%, exactly the same as the fall for those to Germany. It’s not a great omen for the second quarter. Thursday’s announcements weighed slightly on the pound although the announcement of an extension of the 6mth liquidity to banks amounted to turning on the taps of the facility announced back in December. On the Treasury scheme to increase bank lending we await more details. What’s interesting is the limited reaction to King’s comment on quantitative easing in which he suggested that “the case for further monetary easing is growing”. For sterling, even if there is further QE, the impact on rates and the real economy is far less certain than was the case with the previous tranches – and even then the impact was unclear. Therefore, even though sterling is weaker, all things considered it’s a modest reaction but probably the correct one.
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