Market Overview

Previewing Sunday's Greek Election

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The Greeks are set to flock to the polls for the second time on Sunday, as the prior election did not result in a majority. Surveys conducted prior to the election on June 1 showed that the conservative New Democracy Party had edged ahead of its rivals since the first state election. Led by Antonis Samaras, the conservative party is committed to adhering to the bailout guidelines and is willing to work with the Troika in implementing the bailout terms.

Earlier this week, Evangelos Venizelos, former finance minister of Greece and leader of the left-wing PASOK party, said that he is in talks with the leaders of the other major parties on forming a majority after the elections. Along with Samaras, Venizelos contacted Syriza leader Alexis Tsipras, Independent Greeks leader Panos Kammenos, and Democratic Left leader Fotis Kouvelis about trying to find a more efficient method to form a government post-election. After the May elections, Greek leaders scrambled to form coalitions, only to come up empty-handed.

Venizelos did say that any government must incorporate all parties, including the Syriza party, Also, he said that the parties need to agree on how to renegotiate the bailout terms and specifically highlight which items they would like changed.

The financial impact of further political deadlock or a radical government are well documented and well discussed among traders. Fitch recently weighed in on the potential after-effects of a Greek exit, stating that there would be limited cross-border impacts due to the domestic-focus of Greek banks. Cypriot banks would also be weak, however, Fitch does not expect large European institutions to be seriously harmed. Fitch does highlight that there is contagion risk, and ratings of other banks will depend on the expediency of crisis actions taken by politicians to prevent contagion.

Greek banks would be crippled in a Greek exit, as they are already suffering from massive deposit flight. On Wednesday, major Greek banks reported that deposit outflows have reached between 500-800 million euros per day across all of the large banks. They also noted that the pace of withdrawals has accelerated heading into the elections. One banker said that the outflows were manageable and were matched by the emergency liquidity assistance program set up by the ECB.

The upcoming elections will be extremely important and wise traders would either close or protect positions heading into the weekend. Recently, Greeks have been rallying behind the pro-Europe parties, as European officials have taken a harsh tone with Greece. Before, Greeks might have thought that European leaders would give in, however that has changed and with the new tone from European leaders. Greeks could be shifting towards the pro-European New Democracy of PASOK parties.

Traders should look for volatility in the euro next Monday as well as global stocks. As much as investors would consider shorting the EUR/USD pair ahead of the vote, consider shorting the EUR/JPY instead. This pair has moved more in line with the crisis than has the US dollar, and should be very volatile after the elections. The long term chart, shown below, does tell much, but on the short term charts there is significant resistance at 100 and 100.65, vs the current 99.96. If the pair fails 100, shorting it into the weekend may make sense. However, the chart looks susceptible to a short squeeze, as the next resistance is at 101.85.

This weekend will surely set the tone for the markets at the beginning of the week, where all eyes will then turn to the Fed. A bad outcome from these elections will surely prompt global central banks to act. Keep the news open this weekend, it shall be entertaining to say the least.

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