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Massive defeat for Schadenfreude: so is the euro safe?
Publication date: 18 June 2012
Author: Mark Deans, Moneycorp
At weekend elections the French Socialist party won a commanding parliamentary majority, giving President Hollande the power to tax and spend to his heart’s desire. In Egypt the theocratic Muslim Brotherhood claims its candidate Mohammed Morsey beat the army’s Ahmed Shafiq in the presidential runoff. And in Greece the centre-right New Democracy knocked the populist pan-European Schadenfreude party into fourth place behind anti-austerity Syriza and pro-austerity Pasok. With 129 of the 300 parliamentary seats under its direct control, New Democracy has a better chance of forming a coalition than it did after the first election six weeks ago.
It is fantastic news for the single currency. Investors now scoff at the notion that Greece might default on its debts or leave the euro. They are flocking to buy Italian government bonds and flooding Spanish banks with deposits. All of Euroland’s worries are over. Forever.
Wow, that was good stuff! Now, where were we? Ah yes, the Greek election. The early reaction of financial markets has been muted by the lack of an overall majority but has been generally positive. Share prices have moved higher, as have commodities, oil and commodity-related currencies. The safe-haven US dollar and Japanese yen are lower.
But that does not tell the whole story. Compared with Friday morning the euro is indeed higher against the yen and the US dollar but it is half a cent softer against the pound and lower too against the antipodean dollars. Yes, investors are relieved that the Greek election went almost as well as it possibly could, but the overall sensation smacks more of realism than of euphoria. Euroland’s problems are not, of course, banished at a stroke by New Democracy’s slender win. If the Syriza leader sticks to his guns Greece could conceivably end up with a ND/Pasok coalition, the equivalent in UK terms of a Conservative/Labour government. It would not be a good look.
While investors are waiting for the coalition cards to fall they can entertain themselves by hunting for today’s economic data. They have already missed half of them so it will not be an easy task. Westpac’s index of New Zealand consumer confidence slipped by two and a half points in the second quarter, asking prices for UK real estate hit a record high this month and Australian motor vehicle sales went up by a useful 22.4% in the year to May.
Yet to come are Canadian international securities transactions and the US NAHB housing market index. Nationwide’s UK consumer confidence index appears tonight. There isn’t much motivation for investors there. Perhaps they would feel more positive about things if they were to spend the day watching re-runs of Greece knocking Russia out of the European football championship on Saturday night.
Otherwise, things might not go so well with the euro. Only a week ago investors demonstrated their ability to avoid falling for the obvious answer. The positive reaction to Spain’s bailout lasted for only a few hours. It is not impossible to imagine the same thing happening today.
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