Greek elections to keep tensions high

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Instead of backyard barbecues and beer, this Father's Day could see many investors with their minds on Greece.

The Greek election, that is. One thing is almost certain to come from the Sunday event, and that is more volatility for US stocks, according to analysts and investors.

“I think the S&P futures will see their high or low depending on the outcome within one hour of the futures' opening on Sunday night at 6 p.m. Eastern time,” said Elliot Spar, option market strategist at Stifel Nicolaus & Co.

Analysts have viewed the Greek election as a potential turning point for Greece, with all eyes on whether voters will favour the leftist Syriza party opposed to the austerity measures that are part and parcel of Greece's international bailout package, or the conservative New Democracy, which is committed to upholding terms of that agreement.

The election, which could result in Greece's eventual departure from the euro zone, is also seen as another hurdle for the wider euro zone, which has been embroiled in a debt crisis for well over a year.

The rest of the week is not likely to be any quieter. The Federal Reserve is due to release a policy statement on Wednesday at the end of its two-day meeting, and the steady flow of sovereign debt warnings and downgrades is likely to continue.

Central banks from major economies are ready to take steps to calm financial markets should the outcome of the Greek elections create a market storm.

In yet another sign of investor nervousness, the CBOE Volatility index, Wall Street's fear gauge, was up for much of Friday, even as stocks rose, although the VIX finally closed lower. Stocks and the VIX typically have an inverse relationship.

One likely outcome of the Greek election is the failure of any party to form a coalition government, said Gregory Peterson, director of investment research at Ballentine Partners LLC in Waltham, Massachusetts, which manages $3.5 billon.

“I think that's a fairly high probability outcome,” he said. “It's going to leave a lot of heads scratching, and that's probably not going to be good for the market.”

A more bearish outcome would be one that presages an unraveling of the euro zone, said Peterson, whose firm starting reducing its exposure to European assets “over a year and a half ago.”

Many investors have been trying to prepare for the worst.

“People have been hedging their positions aggressively over the past two weeks heading into this weekend,” said Alec Levine, derivatives strategist at Newedge Group SA in New York.

“No matter what happens next week, we will return to a massive game of chicken between the newly elected Greek government, whoever that may be, and the EU, specifically Germany.”

THE FED AHEAD

Despite the fears, stocks ended the week on a positive note, marking a second straight week of gains. The benchmark Standard & Poor's index is now up 6.8 percent for 2012, though still well off its highest levels of the year.

Part of what has spurred optimism for stock investors in recent weeks has been the hope that the Fed and other central banks would act to provide more economic stimulus. There has been continuing speculation over whether the Fed will engage in a third round of quantitative easing.

“We do think that expectations of QE3 will drive the market one way or the other,” said Omar Aguilar, chief investment officer for equities at Charles Schwab Corp, in San Francisco.

But the fact that the Fed has made no recent changes to policy could mean the economic data policymakers are seeing is “not as bad as everyone thinks,” said Aguilar.

Weeks of worries over potential outcomes of the Greek election have prompted a number of central banks to prepare for market problems.

Among them, European Central Bank President Mario Draghi said the ECB was ready to step in and fund any viable euro zone bank that gets in trouble. The Bank of England on Thursday announced a 100 billion pound ($155 billion) offer of loans to banks.

Also ahead of the vote, Russell Indexes said certain events in Greece could mean changes in its indexes through implementation of its “financial crisis” rule. Its indexes include the Russell Global Index.

ON RATINGS WATCH

Adding to investor nervousness has been a slew of recent ratings cuts.

Among the most recent, Fitch Ratings on Friday downgraded Egypt's sovereign credit rating deeper into junk status. On Thursday, Egan-Jones cut France's sovereign credit rating.

Many investors see that trend continuing as agencies try to gauge the impact of the euro zone and other problems on the global economy.

“We're probably going to see more of it,” said Peterson. - Reuters


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