Post-Election Rally Fades

Currencies Direct June 19th 2012 - 2 minute read

Hopes of a sustained rally in risk assets
after New Democracy, the pro-bailout party captured top spot in the Greek
election were short lived.  Once again in this Greek saga, we end up with
a decision that leaves us none the wiser in terms of finally getting a
resolution to the ongoing see-saw of will they- won’t they leave the Euro-zone.
It would not be a surprise to see the current government  last only a
short period because economically Greece will continue to deteriorate unless
either they renegotiate the terms of the bailout (unlikely) or Germany has a
sudden change of heart and allows fiscal transfers to the Hellenic Republic
(very, very unlikely). We still believe there is a limit to how much austerity
the Greek electorate will take, and that means Greece potentially leaving the
Euro-zone will continue to drag on, even after a pro-bailout party has formed a
government.

With the election over, the market now looks
towards the FOMC
meeting tomorrow. Several of the large investment houses think the Fed will
begin easing once more in light of stalling job creation and declining growth
prospects at home, and the triple threat of slowing in Europe, China and the
BRICS. Whether the Fed will extend operation twist or begin outright QE again
is quite uncertain, but it is very likely that they will take action this
month. If they do not, the market will be very disappointed. The Fed may also
choose to announce an extension to their commitment to low rates out to 2015
(or longer) from the current promise of late 2014.

Data highlights for the rest of the week
include Jobless Claims and the BoE minutes. The main question remains how close
the MPC are in announcing further QE alongside the credit easing policy from
last week. German economic sentiment is also due this morning.

 

Report by Alistair Cotton

 

Written by
Currencies Direct

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