European stocks are expected to soar Monday as investors breathed a
sigh of relief following the victory of the pro-bailout New Democracy
party in the Greek elections but the relief rally could be short-lived
with the euro already paring gains against the dollar, as the New
Democracy must now try and form a viable coalition government.
The winning party has started talks with the country's socialist party
Pasok to form a new government, with a cross-party coalition likely to
be formed by Wednesday. This has, for now, alleviated concerns that
Greece is on its way out of the euro.
New Democracy leader Antonis Samaras has already vowed to respect the
country's commitment to a 173 billion euros ($218.6 billion) bailout
agreement with the European Union and the International Monetary Fund
and invited all the parties that support Greece's membership of the
euro to join a national "salvation" government.
However, financial markets are likely to remain wary until a coalition
is formed. On top of this, it is likely that a new Greek government
will seek to renegotiate bailout terms. "Uncertainty is likely to
remain high once the new government is sworn in. A renegotiation of
the Troika program is likely, but it will probably imply some official
debt forbearance and won't be plain sailing," said economists at BNP
Paribas.
Andrew Taylor, market strategist at GFT, has called the U.K.'s FTSE
100 to start up 60 points, or 1.1% higher at 5538, Germany's DAX up
132 points, or 2.1%, at 6361 and France's CAC-40 up 49 points, or
1.6%, at 3136. "Rallies will remain fairly limited in the interim but
may get a short burst of risk buying should the New Democracy party
form a coalition," said Mr. Taylor.
There was further positive news from the political spectrum on Sunday.
In the French parliamentary elections the Socialist party of recently
elected President Francois Hollande secured an absolute majority.
"This will permit President Hollande to govern on the basis of a
parliamentary majority that does not rely on hard-left support,
thereby allowing a more pragmatic policy stance on key issues," said
Goldman Sachs.
The conservative victory in Greece was quickly felt in the currency
markets. The euro initially soared on the news, though it pared its
gains to $1.2717 compared with $1.2640 late Friday in New York. The
U.S. dollar strengthened against the yen to 79.23, compared with 78.70
late Friday in New York. Much hinges on the coalition talks between
New Democracy and Pasok. "The risk remains that prolonged discussions
could quickly result in the euro erasing its gains," warned Mitul
Kotecha, head of global foreign exchange strategy at Credit Agricole
Corporate & Investment Bank.
Meanwhile, the outcome of the Greek election sparked a rally in risk
assets in Asia on Monday as investors were cheered by the victory of
pro-bailout New Democracy party as the results pushed up both
currencies and stocks, though the euro pared some of it early gains as
the day progressed.
Stocks across the region climbed with Japan's Nikkei up 1.8%,
Australia's S&P ASX 200 advancing 1.9% and South Korea's Kospi was
1.6% higher. Hong Kong's Hang Seng Index was 1.2% higher while the
China Shanghai Composite gained 0.4%.
On Friday the Dow Jones Industrial Average advanced 0.9% to 12767.17
to close near Friday's session highs. Blue chips posted their first
back-to-back triple-digit gains since November, on the heels of
Thursday's 155-point advance. The Standard & Poor's 500-stock index
advanced 1% to 1342.84, as energy and technology stocks led all 10 of
the benchmark's sectors higher. The Nasdaq composite added 1.3% to
2872.80.
Elsewhere, Nymex crude futures for delivery in July was up $0.88 at
$84.91 a barrel, while the Brent crude futures contract for August was
up $1.08 at $98.69. Spot gold fell $4.70 to $1,623.30 a troy ounce.
The September bund was down 0.71 at 141.58, with investors gingerly
coming out of safe havens Monday.
There are several other factors that will guide the progress of
financial markets this week. Investors will be looking to see what
policymakers decide at a series of key meetings--such as a summit of
Group of 20 leaders in Mexico Monday and Tuesday and the monthly
rate-setting meeting of the Federal Reserve. Also, Spain has both bond
and bill auctions this week. Another important point on the horizon is
a summit of EU leaders at the end of the month.
Write to Andrea Tryphonides at andrea.tryphonides@dowjones.com
(END) Dow Jones Newswires
June 18, 2012 02:55 ET (06:55 GMT)
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