On this holiday Monday on either side of the pond, the two biggest market fears, the European Union (EU) and Ukraine parliamentary election results, combined with the European Central Bank (ECB) meet in Sintra, Portugal, could have had an adverse effect on these thin markets. So far, the liquidity-deprived trading seems to be taking the election results and ECB President Mario Draghi in its stride.
Euro equity markets have even managed to push higher, dismissing the strong gains antiausterity parties made in the European parliamentary elections over the weekend. Heading into the event risk last Friday, the market had already priced in a strong euro-skeptic showing. This morning’s push higher is mainly the ‘relief’ effect.
Antiausterity Movements Grow Across EU
In France, the National Front (+25% national vote) appeared to score a historic victory. In Germany, Chancellor Angela Merkel’s Christian Socialists looked in control, while the euro-skeptic Alternative for Germany took +7%. Greece’s radical right Golden Dawn party and the U.K.’s Independence Party also gained considerable support. It remains unclear whether the results will have a lasting effect on the markets beyond the beginning of this week. The repercussions are to be felt more at domestic levels rather than at EU or national levels. British Prime Minister David Cameron understands clearly that the electorate is deeply disillusioned with the EU, but he will not shorten the timescale for negotiating any new EU deal. Despite the growing European antiausterity voice, it’s not enough to impact the policy trend, as major political equilibrium remains unchanged.
‘Chocolate King’ Wins Ukrainian Presidency
In Ukraine, candy tycoon Petro Poroshenko declared victory in the first round of that country’s presidential election. A result not unexpected – the pro-European businessman took more than half of the vote. The morning’s fading geopolitical uncertainty is supporting both the Russian stock market (Micex +1%) and the RUB (USD 34.03 and EUR 46.37) especially after Russia gave the nod to Kiev’s new government last Friday. With many uncertainties out of the way, the RUB is expected to restore its correlation with emerging market currencies.
Draghi Warns of Deflation
Meanwhile, Draghi delivered nothing new in his closing remarks at the ECB’s central banker conference this morning. His comments left the EUR little changed (€1.3840). Not surprisingly, he sees a risk that expectations for ultralow inflations may delay consumer and business purchases. Consider it the latest sign that euro policymakers are prepared to take further easing measures when the ECB’s Governing Council meets on June 5. Again, he signaled that the ECB is weighing a “wide variety of steps from interest rate cuts to new bank loans or broad-based asset purchases” to prevent low inflation from undermining the region’s promising economic recovery. Euro policymakers fear that disinflation expectations could take hold.
Since Draghi commented earlier this month that June 5 could see easing steps – backed up since by regular ‘dovish’ rhetoric from voting members – the event risk is that the ECB stands pat. The central bank cannot afford to do so at this well telegraphed meeting, otherwise euro policymakers will lose what’s left of their market credibility. The real fear is that the cuts, or whatever, do not go deep enough for the market. If that’s the case, the dollar’s strength that the market has been pricing in since the last ECB meeting will be given up. In addition to using conventional interest rate tools, options include long-term loans to banks, and purchases of asset-backed securities.
The EUR initially lost ground early Monday on the back of strong gains for the antiausterity parties; however, equities rallied to heights not seen since 2008. Obviously, thin holiday conditions played a part, but so too do limited volumes. The 18-member single currency remains precariously perched ahead of the presumed option barriers and psychological support at €1.3600 (€300M), 15, 20. More are seen above €1.3650 (€350M). Stop-losses are supposedly large sub-€1.3600 and €1.3550. On the crosses, the EUR has been underperforming and this vulnerability could garner further support for the currency. With both London and New York out today, the market may not have the will to entertain much interest. Expect forex market action to pick up tomorrow.
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