Markets have an eerie calm before Greek elections. This past week, the G20 nations assured the world that there is cohesive plan among their countries to prop up and maintain global liquidity. They are not depending the EU and ECB to handle any crisis arising from Greece. Overall market panic is fading and this is good for risk assets.
The reason, for the drop in risk aversion and anxiety are fit one of these scenarios:
1) Even a worst case scenario from Greece is likely to be met with central bank action;
2) Traders are hesitant to add to their already record long USD positions ahead of what is likely to be a dovish Fed next Wednesday;
3) Outside of Europe, there is building evidence that China is increasing stimulus on both the monetary and fiscal fronts, while the US economy continues to roll along, removing some of the global growth downside fears.
Whatever the case risk seems to be falling and calm prevailing.
The Greek Election is unlikely to be the binary risk that many are predicting and for those with
deep pockets it might be worth being long EUR into.
The potential scenarios include:
1. EUR positive – The ND (conservative, pro-bailout) win a majority; risk of a Greek exit drops.
2. EUR negative (but not a collapse in EUR) – The SYRIZA (radical left, anti-bailout) win a majority and the risk of a Greek exit rises; however a round of negotiations with the troika would ensue, leaving lots of room for avoiding the worst case scenario. In addition a SYRIZA majority likely increases the risk of major and potentially coordinated central bank action, which provides a floor to EUR weakness & potentially, after the knee jerk reaction, a temporary rally.
3. EUR neutral ( most likely) – No majority and the parties attempt to form a coalition over several weeks. Should they fail another election will be held. Uncertainty builds, but with global central banks ready to step in, EUR remains supported.
Greek law stopped all public polls several weeks ago and there are no numbers to help markets predict the outcome.
At present, we know that the polls will begin to close at 7pm and we should get some on the spot updates. By 9:30pm, they are hoping to announce the winning party, but it could be later or longer. This also will not be the final result.
Unless there is a party with a large majority, the difficult part comes next and that is forming a government, which the parties were unable to do in May.
Whatever the outcome or events, we can expect markets to be volatile on Monday with investors, politicians and bankers on the edge of their seat.
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Originally posted here