IG Markets - Afternoon Thoughts

IG Markets - Afternoon Thoughts

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Across Asia, markets are mostly higher in cautious trade ahead of this weekend’s Greek elections. Risk assets rallied in US trade after the latest round of economic data fuelled talk of Fed easing even further. A bigger-than-expected result for unemployment claims and a benign inflation reading saw investors speculate the Fed might conduct some easing to spur growth. Plummeting energy prices helped drive headline US CPI inflation below the Fed's 2.0% target in May for the first time in 16 months. The main story in the European session was a rally in Greek markets on speculation the pro-bailout party might win the elections. Risk assets and risk currencies were given an added boost late in the US session by reports that global central banks were preparing coordinated action if the results of the weekend Greek elections generated turmoil in the markets.

Taking a closer look at regional markets, the Hang Seng has risen 1.2%, Nikkei is up 0.3% and the Shanghai Composite has edged higher by 0.2%. After dipping into negative territory earlier on, the ASX 200 is off its lows and currently 0.5% higher. It will be interesting to see if regional markets can maintain these gains into the close, given the magnitude of importance of the Greek elections. European markets are facing modest gains at the open after having missed out on the rally in US trade. US markets are pointing to a slightly firmer open. Ahead today, we have the Empire State manufacturing index, industrial production and consumer sentiment data due out of the US. In Europe, we have employment change, trade balance figures and a speech by ECB President Mario Draghi to look out for.

However, all this data is a curtain raiser for the Greek elections. Indecision reigns supreme in most asset classes at present, and this can be seen front and centre in this week’s price action. The Australian cash 200 may have traded in a 61-point range for the week and is fairly flat at current prices. The chances of the index closing below the weekly uptrend are slim, and we will need to see the bears come out in force in global markets tonight for this to take place. However, given the huge event risk over the weekend and next week, the uptrend should be watched closely going forward.

Remember, voting on the Greek elections closes at 02:00 (Sydney time), and at 04:45 the first official projections should be provided. By 08:45 we should know around two thirds of votes, and we should have a good idea of the full votes by 15:00, an hour before the cash market close. There is a real possibility we will see New Democracy get the largest percentage of the votes, but will it receive enough to get the 151 seats to form an outright government? This is highly unlikely and our base-case scenario will be that it will then be asked by the President to form a government by reaching out to other parties. If it can form a government with PASOK (also pro-bailout), then risk assets should do very nicely. If it still doesn’t have the votes to get 151 seats even with minority support, then this is where markets start to worry that we may well see another election sometime in late July/early August.

Hopefully we see a straight New Democracy victory, however the chances are it may not get enough votes and have to appeal to other parties. A straight Syriza win is a low possibility, however if this does transpire then it would be negative, but not as bad as we would have feared two weeks ago, given the EU will likely renegotiate the bailout terms.

www.igmarkets.com.au

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