Today the Markets Seem to Have Constructed a Story That Says the Latest Greek Crisis Is a Plus—I Don't Expect That Narrative to Last
12/10/2014 6:15 pm EST
The muted reaction in European stock markets and strength in the euro today suggest the latest Greek crisis could be a positive, but MoneyShow's Jim Jubak questions if this relatively optimistic reading will hold.
You'd think that the renewed possibility that Greece would exit the euro—if Prime Minister Antonio Samaras loses the snap election that he's just called—would have sent European stocks and the euro down further today.
After all, if the Samaras government loses to a government led by Syriza, it's likely that party will lead Greece out of the euro at a gallop. And there's a very good chance that Syriza will win: the party came in first in the May elections for the European parliament and polls say that Greek voters are really done with the austerity economics imposed by the European Central Bank, the International Monetary Fund, and the European Commission as the price for a 245 billion euro ($305 billion) bailout.
Yesterday, stocks in Athens fell 12.8% on the news in the biggest one-day drop since December 1987.
Today, however, stocks in Athens are down just 1.01%. The French CAC Index is off just 0.89% and the German DAX is actually up 0.06%. In Milan, the MIB Index fell 0.89% and in Spain the IBEX 30 lost 0.62%.
The euro is up 0.49% against the US dollar as of 2:30PM New York time. (The perennial safe haven favorite, the Japanese yen, is unsurprisingly also up against the US dollar by 1.2%.)
Why the muted reaction in European stock markets and why the strength in the euro?
For today, at least, the financial markets are seeing a renewal of the Greek/euro crisis through the lens of European Central Bank policy. The take seems to be that the crisis pushes the bank closer to a big program of asset purchases—that would include the purchase of sovereign debt—perhaps as early as the bank's January 22 meeting. The logic here seems to be that a Greek crisis would be enough to steamroller opposition to the purchase of sovereign debt by the German Bundesbank.
I don't know if that relatively optimistic reading will hold once the multiple rounds of the Greek election start to unfold. First round voting will begin on Wednesday, December 17 with the third and final round set for December 29. If the Samaras government gets hammered in the initial voting, and if it looks like Syriza will form the next government, I suspect that traders will start to rethink today's position.
I think it's pretty clear that a Syriza government would repudiate the current austerity deal with the European Union.
That strikes me as the kind of crisis that turns buying of sovereign debt from monetary policy to panicked effort to head off a full-fledged euro crisis.