Markets react to Greek election results; focus shifts to G20 leadership

June 15, 2012

Risk-on/risk-off environment persists in wake of Greek election

A new legislative election took place in Greece on Sunday following the failure of a coalition government formed after the May elections. The June election was widely seen as an indirect referendum on euro membership—however; initial results suggest Greece will remain within the Eurozone economic and monetary union.

Early reaction from stock markets in Europe was positive; followed by some pullback, particularly in Italy and Spain. Yields on Spanish bonds increased during the morning following the election and U.S. markets are down at mid-day.

The overall message from yesterday’s election, comments MD Chief Investment Officer William R. Horton, Jr. is that "markets are still trading in a risk-on/risk-off environment—leading to overall higher volatility and greater correlation between asset classes than would otherwise prevail."

Policymakers called to action as "political choices have become predominant over monetary policy".

European Central Bank (ECB) head Mario Draghi said on Friday that the ECB would do what was necessary to provide liquidity if necessary to support EU banking systems; which provides strong support for from an influential policymaker. Draghi cautioned that that policymakers need to continue to take action to provide "strengthened foundations" across the Eurozone.

Notes Horton, "the key message from Draghi’s remarks is that policymakers will need to continue to demonstrate they are taking appropriate action to restore economic stability. The focus is now likely to shift to the G20 as the heads of government meet at the 2012 G20 Mexico Summit this week."

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