Published On: Mon, Dec 29th, 2014

Euro zone rattled as Greece braces for elections

Traders are pictured at their desks in front of the DAX board at the Frankfurt stock exchange
European shares and periphery euro zone bonds tumbled on Monday after the Greek parliament rejected the government’s presidential candidate, setting the stage for an election that anti-bailout party Syriza could win.

Greece’s Prime Minister Antonis Samaras failed to get enough support for his nominee, Stavros Dimas, and will now call a national election for Jan. 25.

European markets reflected uncertainty about Greece’s future in the euro zone under a possible Syriza government.

Stocks in Athens plunged as much as 11 percent to a two-year low and yields on government bonds <GR10YT=TWEB> spiked sharply. Italian and Spanish markets also took heavy hits as investors made a dash into ultra-safe German debt DE10YT=TWEB>. [GVD/EUR]

“A Greek accident has become a potent risk. But mostly for Greece itself, ” said Holger Schmieding at Berenberg Bank in London.

“Of course, the tail risk of Grexit poses questions for Europe. But if that tail risk were to materialize, we see no significant probability that any other country would want to follow.”

With many in the market still taking a Christmas break, futures markets pointed to a 0.1-0.2 percent dip from record highs for Wall Street when trading resumes, while in Russia the ruble’s rebound reversed as it dropped as much as 6 percent.

It had all looked much brighter in Asia overnight. Gains of 1.5 and 1.8 percent respectively in Australia and Hong Kong had lifted MSCI’s broadest index of Asia-Pacific shares outside Japan 1 percent.

Tokyo’s Nikkei bucked the trend, sliding 1 percent as reports of a suspected Ebola case in Japan spooked a market still on track for about an 8 percent gain this year.

In Malaysia, shares in AirAsia posted their biggest one-day drop in more than three years after one of its aircraft went missing on its way to Singapore from Indonesia.

 

BAILOUT BARTER

U.S. markets were readying to open following some robust data from the Midwest region but it was the uncertainty in Athens that dominated sentiment.

Greek 10-year bond yields <GR10YT=TWEB> jumped above 9 percent and forced up yields on the bonds of other heavily-indebted euro zone governments, such as Italy <IT10YT=TWEB> and Spain. <ES10YT=TWEB>

Syriza wants to wipe out a big part of Greece’s debt and cancel the terms of a bailout from the European Union and International Monetary Fund that Greece needs to pay its bills.

“With the will of our people, in a few days bailouts tied to austerity will be a thing of the past, ” Syriza leader Alexis Tsipras said after the vote. “The future has already begun.”

The euro, perhaps surprisingly, was little moved by the result but at $1.2190 <EUR=> it was not far from the $1.2165, post-August 2012 low hit the previous week.

The dollar stood firm at 120.40 yen <JPY=> but lacking momentum to challenge a 7-1/2 year high of 121.86 hit earlier in the month after rising roughly 15 percent against the yen this year.

Investors will be concerned about whether the U.S. economy will be strong enough in 2015 to offset signs of slowdown in powerhouse China and the euro zone.

There is also uncertainty about the impact of the 45 percent drop in oil prices over the last six months on many of the larger producers that depend on oil revenues.

After two days of falls, oil prices rose after Libyan officials said a fire caused by fighting at a main export terminal has destroyed 800, 000 barrels of crude, more than two days of output.

“Libya, and all the other problems, warrants some kind of risk premium, ” said Jonathan Barratt, chief investment officer at Sydney’s Ayers Alliance.

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