Week Ahead: roaring rally or deafening panic?

Thunderous relief rally as a Greek eurozone exit is averted or escalated market panic as the nation chooses a bailout-defying path to drachmatisation and economic calamity?

Or, after so much market skittishness ahead of this Sunday’s Greek election, could we get something in between?

The polls are inconclusive – or at least may not be a reliable gauge of voter intentions – but they show no party winning an absolute majority either way in this rerun of the inconclusive May elections. Negotiations would be needed in this case, and these could take days (three days per party until a coalition is formed).

An ‘orderly negotiation’...

If poll leaders New Democracy (ND) win, a relief rally could sweep through markets, buoyed by the successful coalition that is subsequently expected to be struck in such a scenario.

But even then any euphoria could be short-lived, tempered by continuing worries over Greece and Spain, as well ND’s attempts to renegotiate the conditions of its aid package with the ‘Troika’ (the European Commission, European Central Bank and International Monetary Fund).

This though, as analysts at Societe Generale have put it, would at least be an ‘orderly negotiation’, with the Troika willing to make some concessions.

...or a ‘disorderly negotiation’

A victory from the more radical, but increasingly popular, Syriza Party (ranked a close second in the polls) would be more tricky, entailing a ‘disorderly negotiation’. Markets could tumble Monday morning in this scenario.

Syriza leader Alexis Tsipras is determined to cancel Greece’s bailout and adapt a new plan, which includes lower taxes, bigger pensions and a higher minimum wage. As a result the government’s next aid package could be suspended, potentially bankrupting the country and forcing it out of the euro.

But Tsipras, who has no experience in government, will need partners to form a majority coalition. To get the Pasok party on board – third placed in the polls – he will need to moderate his proposals. 

The fall-out from a Syriza victory would likely raise the pressure on peripheral dominoes Italy and Spain, pushing the pair closer to bailouts that Europe cannot afford.

If all of these negotiations are unsuccessful, then the Greeks can simply vote again at the end of July. Cue more damaging market volatility in the meantime.

A final, conclusive result is highly unlikely on Monday morning. And besides, investors will be looking for their next major news hit – a crucial meeting of EU leaders at the end of this month.

In a worst-case scenario on Sunday and in the following week though, world leaders and central banks could be forced to act fast.

US support?

The eurozone crisis, as well as slowing economic momentum in its own country, could lead the US Federal Reserve to announce more stimulatory measures when it meets on Wednesday. Views are mixed from Fed watchers on what Ben Bernanke will announce: QE3, an extension of ‘Operation Twist’ (seen as a halfway house) or merely promises of aid when it is needed have all been put forward by analysts as options.

Industrial production figures and a string of housing data will provide more clues as to the conditions the Fed must consider.

Other signs as to the health of the global economy – and hence markets and policymarkers’ plans – will come from Chinese and eurozone manufacturing figures, as well as the German ZEW index and Ifo business climate indicator, which could point to rare weakness in the eurozone’s paymaster.

At least, say analysts at ING, ‘maybe the slowing of the German economy comes exactly at the right time, making the German government more willing to proceed on eurozone integration’.

UK inflation continues falling

In the UK, data on Tuesday is expected to show inflation falling further (below April’s 3% CPI reading) – easing the pressure on consumers – while unemployment data and numbers on average earnings growth are also due on Wednesday.

On the same day, the minutes from the Bank of England’s policy meeting earlier this month are due. These will be closely scrutinised, though much has happened since the June meeting, with governor Mervyn King last night making strong insinuations that more quantitative easing could arrive very soon.

On Thursday, retail sales figures will be published - a key gauge of both the strength of the UK consumer and British weather in May.