Stocks up as Greece averts 'Drachmageddon'

2012-06-18 07:54

Singapore - The euro jumped to a one-month high and Asian shares rose nearly 2% on Monday after Greece's election delivered a slim parliamentary majority to pro-bailout parties, a result seen as crucial to European leaders' efforts to hold the euro together.

European shares markets were expected to make a strong start, with spreadbetters calling the main indexes in London , Frankfurt and Paris to open 1.2% to 2.2% higher.

US stock index futures and riskier commodities such as crude oil and copper also rose, while gold fell after a rally last week, when investors had looked to bullion as a safe haven amid fears the election could trigger financial turmoil.

But market players cautioned there were still plenty of hurdles ahead and the initial positive market reaction could prove to be short-lived.

"I'm not sure the rally is going to last long," said Dominic Schnider, executive director for wealth management research at UBS. "The problems are still there, you still have huge fiscal issues and it's not just Greece, it's Spain and others."

Parties in Greece that broadly support the €130bn EU/IMF bailout will begin talks on forming a government on Monday. The parties, conservative New Democracy and the mainstream socialist PASOK, would have a parliamentary majority.

Financial markets had feared a victory for SYRIZA, the radical leftists opposed to the austerity package of job, wage and pension cuts that are a condition of the bailout, without which Greece would be bankrupt.

"This election result should keep hopes alive that Greece will stay in the euro," said Taisuke Tanaka, chief FX strategist at Deutsche Securities.

No "Drachmageddon"

MSCI's broadest index of Asia Pacific shares outside Japan rose 2% and Tokyo's Nikkei share average gained 1.9%, touching a one-month high. US S&P 500 futures were trading around 0.4% higher.

"It's a temporary rally but we're seeing broad gains because the global situation has changed now that the prospect of a 'Drachmageddon' has disappeared," said Fumiyuki Nakanishi, general manager of investment and research at SMBC Friend Securities in Tokyo.

The euro was up around 0.6% just above $1.27, having climbed as far as $1.2748, its highest level in a month. The US dollar index eased 0.3%.

US crude rose 0.9% to around $84.80 a barrel, Brent crude gained more than $1 to above $98.60 and copper was 0.7% higher around $7 565 a tonne.

Safe-haven assets retreated, with gold down 0.4% around $1 622 an ounce and benchmark US Treasury 10-year yields rising to around 1.65% from about 1.58% in last US trade on Friday.

As well as cheering investors, the Greek election result should also come as a relief for world leaders who are due to kick off a G20 meeting in Mexico on Monday.

A statement from the Group of Seven major industrialised nations said it was in "all our interests" for Greece to remain in the eurozone while respecting its international bailout commitments.

Crisis not over

But amid the relief, investors' focus was already returning to the many unresolved elements of Europe's deep-seated debt crisis, not to mention concerns over a faltering US recovery and China's transition to a lower growth trajectory.

"We are back to guessing whether or not we will see a growth pact and eurobonds," said Westpac Bank foreign exchange strategists Robert Rennie and Sean Callow in a note. "We are back to guessing when China will come up with a fiscal package to help stabilise a sharply slowing Chinese economy."

Greece's economy remains in deep crisis after five years of recession, Spain has been pushed into seeking €100bn from Europe to rescue its banks and Italy's poor growth prospects and high debt have put it in the bond markets' sights.

After reaching a euro-era high above 7% on Thursday, Spain's 10-year bond yield eased 6 basis points from its closing level to 6.90% on Friday, while Italian yields fell 15 bps to 6.01%.

"Eyes now fall on the opening of the credit-default swap (CDS) and bond market, where a pullback in yields across the sovereigns could push risk up another leg," said Chris Weston, a dealer at IG Markets in Melbourne.