It is not often that the main driver of price activity is as obvious as it will be this week. All eyes are squarely focused on the outcome of the latest political elections in Greece, which are scheduled to begin on the 17th of June. Essentially, what this means is that the main event will take place before the trading week actually begins, and some brokerage offices are so concerned about the volatility that could be created that there have actually been trading stoppages until the election results have concluded. So, what exactly is the issue here, and which markets will be most directly influenced?
The elections in Greece are currently standing at the forefront of the markets focus because if there is any indication that the political majority that is elected is not in agreement with the European Finance Ministry’s outline for acceptable austerity planning, we will start to see significant amounts of analyst commentary that will suggest that a Greek exit from the European Monetary Union (EMU) is imminent. Needless to say, this will create extreme levels of uncertainty and lead to the inevitable increase in market volatility – not just in the Euro but in asset markets generally.
Potential Volatility Increases
Historically speaking, investors are never encouraged by uncertainty, so any turmoil created by the Greek elections will likely bring major selling pressure to the Euro and the major stock indices. Since the money in these markets will have to flow into some other asset, safe haven assets like Gold and the US Dollar have the most to gain from a negative outcome.
On the whole, last week was generally positive with most equities making gains along with high yielding currencies. This, for the most part, was the reaction to various commentary from global central banks which suggested that governments in multiple regions are still open to the idea of monetary stimulus as a means for encouraging growth in the global economy. The EUR/USD finished the week comfortable above the 1.26 level while the S&P 500 managed to regain a foothold above the highly touted 1340 level. But all of this could easily change into the open on Monday, and investors will be keenly aware of the developments that are seen in Greece and take their positions accordingly.
For conservative traders, the prudent move is to stand on the sidelines and wait until the dust settles before entering into new positions. For aggressive traders, however, be prepared for huge spikes in volatility as we are sure to see some fireworks to start the week.
To summarize, a positive outcome will be seen if Greece elects a political majority that is supportive of the EU’s austerity requirements. If this is seen, the EUR/USD is likely to see some massive upside moves. If this does not occur, we are likely to see some very large downside gaps in equity markets and in the Euro in what could very easily be some of the biggest moves the financial markets have seen this year.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.