- Greece returns to the front page as coalition talks threaten new elections
Greek once again takes centre stage as the inconclusive results of the election lead to further uncertainty. Having won the most seats, the New Democracy party was yesterday given a three-day mandate to try to form a coalition. But by end of day its leader Samaras abandoned attempts to find common ground and handed the mandate back to the President. The onus of forming a coalition will now fall on the leader of the Coalition of the Radical left, Alexis Tsiparas. If he fails, then the third-largest party, Pasok, will try to form a coalition. If all three parties fail, then the president will call the leaders of all the seated parties together for one last attempt to avoid elections. But the risk is that ultimately new elections will prove necessary, and a Jun 17 date is already being discussed. But even if a second vote were to result in a more stable coalition, the timing suggests that any new government will struggle to agree on and secure parliamentary approval for EUR 11.5bn in further cutbacks by the end of June, as required for the next troika payment. Despite both ND and Pasok having undertaken formally to abide to the bailout conditions, Samaras said yesterday that the need for renegotiation of the terms was accepted by all parties; the reaction from the Troika and European partners has been predictably dismissive.
- Focus on new Franco-German dynamic, Spanish bank recap plan
Meanwhile, the reaction to the French elections remains muted, with an initial widening of spreads quickly reversed, and with French equities outperforming German ones. Market focus will be on the Merkel-Hollande meeting next week and the extent to which Merkel’s insistence on sticking to the fiscal pact can be married to the new political necessity of a focus on growth. Reports from Spain yesterday indicate that bank recapitalisation plans are underway, with the Chairman of Bankia Rodrigo Rato stepping down apparently in advance of a EUR 7-10bn government capital injection; PM Rajoy is said to announce more details of a comprehensive plan on Friday. But questions are likely to persist about either the adequacy of the bailout if the numbers announced are seen as too small; or the impact on government finances if the numbers are large. Thus we see the combination of recent weak Eurozone data and ample sources of political stress as likely keeping EURUSD and EUR crosses under pressure; we reiterate our short EURUSD, EURNOK, and EURJPY recommendations. In particular, our short EURNOK position may gain even more traction on the improvement in the Norwegian manufacturing production data. Norway’s more favourable growth outlook will be the key factor in driving the pair lower.
- ECB President Draghi set to speak today along with other members
With Eurozone stresses back in the spotlight as voters reject austerity measures, comments from ECB President Draghi, ECB’s Coeure and Praet will be of particular importance later today. The recent disappointment in Eurozone growth makes a case for further easing; however, at its last meeting, there was little indication that the ECB would choose that route anytime soon. Nevertheless, their comments will be gleaned for any further indication on the growth pact that was previously mentioned in light of the mounting voter backlash on austerity measures.
- Fed hawks Fisher and Lacker set to speak
In the US, Fed hawks Fisher and Lacker are scheduled to speak. Their take on the two months of weak payrolls will be important since markets will carefully listen for any comments on whether or not this may change their policy views. Also, the NFIB Small Business Optimism survey will be released. While this is not necessarily a market mover, it is a significant indicator of the overall health of the US economy.
BNP Paribas