SCOREBOARD: Greek gridlock

Currency markets were contained overnight as Greece's complex political equations left investors' questions unanswered.

Exit polls reckon that Syriza, the radical Greek leftist party who wanted to renege on reform measures agreed with the EU and co, have missed out on forming government with only 27 per cent of the vote. Admittedly that is the second highest proportion of votes, but it’s still well short of even a glimmer of hope. The reality is, it was never likely that Syriza would have been able to form an effective government, even if they had won the vote. The election was always about New Democracy and Pasok and whether they could get enough seats to form a coalition without the others.

Official exit polling suggests they might just get enough and with about 20 per cent of the vote counted Syriza had already conceded defeat. They won’t however join a government of national unity which is what New Democracy proposed – a healthy alliance of fanatical leftists, communists, socialists and conservatives. Including a handful of extreme right wingers. Yes! That would do nicely. But Pasok, the socialists who got about 12 per cent of the vote, said there is no coalition and will not be one, without Syriza – of course there won’t be! It’s a pickle. Ridge would know what to do.

The market reaction so far has been quite contained with the Australian dollar and euro pushing higher but only marginally so – 30 pips on the dollar (almost at 1.01) and maybe 60 for euro (1.2866). That’s understandable at this early stage, but at least the world won’t end – today – and in fact it should be a great day for the All Ords as a result. Should be – I mean we already have the advantage of another solid session on Wall Street Friday night, what with the major indexes up 1 to 1.3 per cent. And now, Greece didn’t leave the eurozone, yet again. Phew that was close! The only confusing aspect of it all is that Friday’s stock surge was ostensibly due to the likelihood of further central bank action. You know, following any unfavourable Greek election outcome. Now what, people? Now what?

We’ll find out soon enough. The FOMC meet this week and a decision is due Thursday morning. We’d have to be close to a further bout of quantitative easing. Not that the US economy needs it mind you. Private demand is growing at a reasonably solid pace, employment growth is strong (despite the recent slowdown) and the recovery continues unabated. But, every time there is a dip in volatile data, the recession drumbeat starts up – stall speed, etc. Any excuse to print money and keep treasuries bid. Don’t forget that Operation Twist is pretty much over so there is a huge void to be filled very soon. One option that is highly probable is that they will vote to extend Operat18/06/2012 07:20 AMion Twist, citing fragile financial markets and European uncertainties. If they move again this is probably what I’d expect them to do at this stage. There is just too much opposition to another blatant round of printing with inflation at or above target. The Fed also releases its forecasts but under the circumstance I wouldn’t allocate too much time to reading through them.

Other than the FOMC there isn’t too much to occupy the market – US data includes things like housing starts and jobless claims, not much else – so I’m looking for days of Greek election dissection and maybe some action from the ratings agencies to counter any euphoria over the result. I mean something needs to be done, US stocks have had their biggest two day gain since November.

In Australia the data is equally quiet. We have the RBA’s minutes, but I’m literally not going to read them. The reality is the board have got things wrong and no, recent GDP and employment outcomes shouldn’t have been a surprise and they are certainly not puzzling as some have suggested. The labour market and employment figures have been consistent for well over a year now as I have consistently highlighted. It is only delusion and sloppy analysis that lead to repeated claims of weakness. The RBA should not have cut rates, this is clear. They panicked and all they have managed to achieve in their panic is to undermine an already fragile confidence. People can’t possibly believe things are really OK if monetary policy is continually eased in the face of very positive data. So, will they cut again? They shouldn’t, but they shouldn’t have cut previously and did. So I can’t say they won’t. As I have highlighted before, monetary policy is not being guided by economic data. Future decisions, as with past decisions, will depend on the news flow and the whisperings of the club.

Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

Follow @AdamCarrEcon on Twitter.

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