Weekly Market Review for Week Ending 15th of June 2012
The Greeks have had their election but its results have brought the eurozone no nearer a conclusion to the crisis than the preceding one. After a week spent anticipating Greece’s speedy ejection from the central currency, markets were found twiddling their thumbs on Monday. Any real action on Greece’s position seems no nearer and yet no further away.
The ‘pro-bailout’ party, as New Democracy has become known, received the largest share of the vote, but was a long way short of the mandate needed to build a strong and convincing government. The popular, extreme left group Syriza received the second largest share of the vote. It is likely New Democracy will have to govern in coalition with a party seeking a radical re-negotiation of the country’s treaty with the eurozone. Once again, the situation seems difficult, if not impossible.
The immediate reaction of equity markets showed their quixotic attitude to the eurozone crisis. There was an initial surge on the news the pro-bailout party had won, followed by a shrug of the shoulders with the realisation that this would mean no change for the foreseeable future. It echoed the markets’ reaction to the Spanish bailout last week – initial exuberance, followed by resignation.
It is tempting to conclude that what the markets are really after is change of any kind. They want to believe there is an end in sight – even if the short-term pain may be very severe. It is a cliché worth repeating that markets simply cannot stand uncertainty.
In this context, the real risk for equity investors is that eurozone policymakers continue to prop up ailing countries to the detriment of their own economies, until such point at which they can build a stronger fiscal union between countries. Markets are unlikely to have the patience to deal with the length of time it takes before fiscal union has an impact.
This would be less of a worry if markets actually believed policymakers could pull off such a trick. If markets felt policymakers were moving towards a clear goal, they could probably withstand some bumps along the road. But they don’t. It remains a significant problem that markets have almost no faith that policymakers will take the right actions or that the actions they do take will bring the crisis to a resolution.
So in the meantime, nothing changes. It is an intensely frustrating time for investors with markets hidebound by eurozone events and normal investment metrics having little or no implication. Sadly, despite great expectation, the Greek election has changed nothing at all.