Prospect of Greek Election Weighs on European Asset Markets

The failure of Greek Prime Minister Samaras to secure sufficient votes in the third and final parliamentary attempt to select a new president has sparked a sell-off in European stocks and peripheral bonds.  Up until now, the contagion from Greece has been remarkably limited.  Perhaps it is the thin holiday markets that is exaggerating the knock-on effects.  At the same time, the fear that the Greek election will morph a Greek exit from monetary union is palpable.

Greek President Papoulias has up to ten days to set an election date.  It must be 21-30 days from the announcement.  By tradition, the election is held on Sunday.  That makes January 25 or February 1 the most likely.  The latest polls show the anti-austerity Syriza with a small lead, but it has been narrowing slightly in recent weeks.

The other operative force is that the extension of the previous assistance program from the Troika was extended for two months expires at the end of February.  It does not give the new government very much leeway.  By the end of March, Greek government guarantees (~30 bln euros) will no longer be accepted by the ECB as collateral for new loans.  

If Syriza's challenge is to be turned back, it does not appear that Samaras can do it.  Samaras has too much baggage--made too many enemies--over his career in Greek politics.  If Samaras steps down as head of the New Democracy and a new candidate is  (such as Dora Bakoyannis), we suspect that there were be an immediate impact in the polls.  

Greece's 10-year benchmark yield has risen nearly 100 bp today.  Italian and Spanish benchmarks yields are 10-11 bp higher, while the safe haven German bund yield is at new record lows (below 57 bp).   Greece's equity markets are off 8-9% today, with financials off more than 12%. 

The euro itself relatively subdued.  It could not the push toward $1.2220, but it has held above last week's low near $1.2165.  The selling of Greek assets does not necessitate the selling of euros, but clearly the political development is not a supportive factor.  

On the other hand, Sweden has canceled the election that was going to be held in March, and it has done little for the krona.  The euro is flirting with two-week highs against the krona near SEK9.60.   The six main parties struck an agreement that will make a minority government more stable.  Going forward the main opposition parties will abstain from voting on the minority government's budget.  This deal effectively undermines the ability of a small party from being an effective obstructionist.   Swedish bonds and equities are firmer, even if the currency isn't.

Fires at Libya's largest oil storage facility is give oil prices a firmer tone today.  However, the Russian rouble has found little support.  The US dollar traded at a five-day high against the rouble near RUB58.56.  At the end of last week it had neared RUB50.75.  

Sterling has trading on both sides of last Friday's narrow trading range (~$1.5537-70, according to Bloomberg).  However, we would not read much into it from a technical perspective.   A significant low is not in place.    Meanwhile, new supplemental budget approved by the Japanese cabinet over the weekend failed to lift the Nikkei (-0.5%).  The JPY120.20-JPY120.60 may contain the price action during the North American session.