The FTSE 100 closed on Friday at 5,479, up 0.8% on the week. The Dow Jones Industrial Average gained 1.7% on the week to close at 12,767, after a 115 point gain on Friday. The S&P 500 Index moved up 1.3% on the week to 1,343 and the Nasdaq Composite rose 0.5% to 2,873.
Gold finished up $13.5 on the week at $1627, while Brent Crude continued its recent decline, closing below the benchmark $100 level at $97 – $3 down on the week. The 10-year US Treasury note yield continued to fall hitting 1.58%.
Plenty for investors to think about in the next few days, with the Greek elections today squarely at the top of the list.
Central banks around the world seem to be ready to pounce in the event of the Greeks voting in anti-austerity parties and which would likely lead to the return of the Drachma. German Chancellor Angela Merkel continues to reiterate that a softening of the Greek austerity package for the €160 billion bail out is off the table. Germany is making it clear that payment of rescue loans would immediately cease if the country failed to meet its budgetary obligations. The Germans have no other choice otherwise Ireland, Portugal and Spain will so be demanding the soft option for themselves.
Official opinion polls are banned before elections in Greece so there is no way of knowing whether the winner last time, New Democracy, which supports the country’s multinational bailout, will lead the push to form a coalition government once again.
The big worry will be if anti austerity, Syriza, which finished in second place last month, will increase its share of the vote compared with the May election. Syriza‘s leader, Alexis Tsipras, wants to remain in the euro but believe they can extract big concessions from the Eurozone to soften the impact of austerity on ordinary Greeks who still getting used to the new era where they will have to pay some tax on their incomes! If Syriza win, expect carnage on the stock markets next week.
With G20 leaders meeting in Mexico there could be plenty for them to talk about if the stock markets of the world go into free fall on the “Grexit” scenario. The Bank of England already caused a rally in British banks on Friday by announcing cash for loans and a softening of their capital requirements. But to avoid a depression, given we are already in our second recession, more radical steps may be required by the Bank of England.
With Spanish bold yields moving over 7% last week and pressure beginning to mount on Italy, the key question is whether problems in Greece cause huge contagion across the Eurozone. Bond investors are clearly not reassured that this can be the case.
2008 all over again?
It feels like 2008 all over again when Lehman brothers was teetering on the verge of collapse and the Federal Reserve and US Treasury department finally let CEO Dick Fuld and his merry men file for bankruptcy causing catastophic falls on Wall Street and global markets.
Central banks are saying they will deploy what they can to avoid Greek contagion but what have they got left in the armoury? Interest rates are rock bottom (UK 0.5%, US 0.25%), quantitative easing has been tried in the UK, Europe and the US, with seemingly little positive impact, operation “twist” where the US Federal Reserve sells short term treasury bonds and exchanges them for longer dated paper again has been tried too. The alternative seems to be the printing of huge amounts of bail out cash which means good news for gold investors.
This week will certainly be fascinating whether we see the Greeks realising the writing is finally on the wall or whether all hell will break loose and the Drachma arrives back on the Greek Islands! Good news for holiday makers!!
Contrarian Investor UK