Greek turmoil offset by talk of G20 response

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Published Jun 15, 2012

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World markets rallied on Friday as investor fears of euro zone chaos following Sunday's Greek election were at least partly offset by talk of a coordinated response by the world's major central banks to any market dislocation.

G20 officials told Reuters on Thursday that the top central banks stood ready to stabilise financial markets by providing liquidity if the election result causes financial upheaval.

“It tells us that central banks at least won't let markets collapse on Monday,” said Emile Cardon, economist at Rabobank in Utrecht.

G20 leaders meet in Mexico on Monday and Tuesday as the results of the Greek vote and market reactions emerge.

Expectations of more monetary stimulus were boosted by a British plan to flood its economy with cash, and after economic data in the United States rekindled talk of further easing by the Federal Reserve which holds a policy meeting next week.

The Bank of Japan left its policy unchanged after a two-day meeting but European Central Bank President Mario Draghi signalled a euro zone rate cut was possible and said the ECB stood ready to support the banking system as required.

The MSCI world equity index rose 0.4 percent at 303.64 points and the FTSE Eurofirst 300 index of top European shares was up 0.8 percent. European bank stocks were up 1.65 percent.

Emerging markets, which have been hard hit by the prospect of another European banking shock and global recession, also outperformed the broader world indices, gaining more than 1 percent during Friday's session.

“Right now we are faced with the uncomfortable combination of extremely oversold markets and a number of signals telling us it is right to panic,” said Robert Farago, head of asset allocation at Schroders Private Banking.

“This leaves us poised for a rapid rebound if anything is done to restore confidence but vulnerable to accelerating downside if authorities remain on the sidelines.”

The euro was steady at $1.2615, well above a two-year low of $1.2280 hit on June 1, with the market nervous about the impact of the Greek election on the future of the currency bloc.

Wall Street stock futures were 1.3 percent higher ahead of the New York open.

IN GREEK HANDS

Victory for the anti-bailout far-left SYRIZA party on Sunday would send tremors around the market place. Euro zone leaders have warned Greece that no more funds would be forthcoming if Athens reneges on agreed austerity terms pushing it towards the currency bloc's exit door.

Illustrating the concern about the fallout from the vote, AllianceBernstein economist Darren Williams said it could be pivotal moment in the post-war history of European integration.

“A Greek exit, even if carefully managed, would shatter the myth that euro-area currencies have been irrevocably fixed, and send shockwaves through the region's financial system,” he said.

More likely, however, is an inconclusive result which leads to days of horse-trading over the formation of a government. There is also a good chance that pro-bailout New Democracy takes first place and claims the 50-parliamentary-seat bonus that comes with it.

That would put it in pole position to form the next government, an outcome that could see markets rally and take pressure off Italian and Spanish borrowing costs.

Italian 10-year government bond yields were 15 basis points lower at 6.01 percent, with traders saying market players were covering short positions before the weekend.

Spanish 10-year yields shed 6 basis points lower at 6.90 percent, having nudged above 7 percent on Thursday.

Analysts said there could well be no need for a crisis response on Monday but Japan's Ministry of Finance said it would act to curb upward pressure on the safe haven yen and there are strong signs that monetary policymakers are ready to respond to a gathering global slowdown in a more measured way.

The British government and Bank of England said on Thursday they would flood Britain's banking system with more than 100 billion pounds, China surprised with a quarter point interest rate cut last week and Draghi noted a series of poor euro zone economic data of late, suggesting a rate cut could be on the cards.

For some market strategists, an unclear election outcome may even be a positive in the short run.

Bank of America Merrill Lynch told clients that one of the best - if least likely - results for European stocks may be a failure by Greece to form a pro-EU government, followed by a substantial policy response from the ECB.

That would lead to a “policy rally led by financials and cyclicals/commodity plays”, potentially pushing the STOXX index to as high as 280 from around 243 now.

Brent crude futures rose towards $98 per barrel, following stock market gains. Gold prices held firm above $1,620 an ounce in Europe as caution ahead of the Greek elections kept buyers on the sidelines. - Reuters

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