Rally Fades Quickly
The optimism surrounding New Democracy’s victory in this weekend’s Greek election did not last long, with the euro paring its gains made in Asia as the fixed income markets in Europe came back under heavy pressure. Spanish fixed income markets were the big movers, with 10y bonds falling by around 20bp. The Bank of Spain released a series of updates which kept Spanish bonds under pressure. They reported bad loans as rising to EUR152.74 bn in April, while the bad loans ratio rose to 8.72%. Deposits in Spanish banks dropped 2.52% in April from March. Eurozone Finance Ministers issued a joint statement after the Greek elections reiterating their commitment to assist Greece, but stopping short of offering any specific concessions. The statement did however hint at some flexibility on Europe’s part by suggesting that the troika’s next visit to Athens could be a useful opportunity “to exchange views with the new government on the way forward”. Slovak PM Fico said giving Greece more time to deliver on commitments seems to be the solution, but a German government spokesman then poured cold water on the issue, saying that the time plan for Greece stays as agreed. New Democracy leader Samaras is due to meet Syriza leader Tsipras at 2 pm local time, as attempts to form a coalition government get underway. It is clear that New Democracy and PASOK have sufficient numbers combined to form a coalition government (projections suggest they will command 162 seats in a 300-seat parliament). Whether such a government will ultimately be formed is another matter and it seems days of tortuous negotiation still lie ahead. Unnamed party sources told Reuters that PASOK is likely to pursue a policy of limited involvement with any new administration – not obstructing a vote of confidence but yet refusing to take up ministerial posts in the new cabinet. To us this does not sound like the recipe for a stable government and we would have concerns over how long such an administration could last – especially in the face of a succession of crunch parliamentary votes over the months ahead. We remain bearish on the euro given the political uncertainty in Greece is not likely to come to an end anytime soon and, as such, questions about Greece’s continued membership of the Eurozone are likely to haunt the currency for many months to come. Today, while listening for political reaction in Greece, investors are likely to keep one eye on the G20 meeting. Given Greece’s relatively benign election outcome a coordinated policy initiative seems increasingly unlikely, and we would be surprised if the G20 felt compelled to make any market-moving announcements.
Click here to read the full report: UBS Morning Adviser America
UBS Investment Bank