Greek government teetering – market looking for a response

We dipped rather close to sheer panic mode as Greek government is teetering already today and as EU risk spreads surge wider. Where’s the EU/ECB response and how much credibility will it receive?

The Greek government appears on the verge of collapse as a number of ruling party members are abandoning ship and possibly leaving PASOK without a majority. If PM Papandreou can’t get the votes to move forward with a referendum, a snap election would likely be called instead – possibly as soon as today as he has called an emergency cabinet meeting as we are writing this. The sudden signs of party discipline crumbling here later in the day seem to have created a bit of a bounce in risk from very low levels as we are writing his, as if this is preferred to a referendum outcome? Hard to believe that and hard to draw a bead on market thinking, but needless to say, the market is very nervous here, and extreme caution should be taken by market participants, as the threat for extreme volatility often grows as volatility itself grows.

The day’s developments have of course sent the Euro lower virtually across the board (against the majors, at least. Against CEE and other EM currencies, we’re seeing new highs for the cycle as risk is most distinctly off today. EURHUF is close to its early 2009 high.). European equity markets have been blasted for their worst losses since 2008 in some cases and sent peripheral yield spreads flying wider. Italy’s 2-year spread to Germany widened out beyond 500 bps for the first time, for example. What will be the response from the troika? It’s the ECB that can do the most in the immediate term, but will it – and here we have the first day of President Draghi on the job.

Odds and ends
All other news pales in comparison to the unfolding crisis in Greece, but a few other tidbits are worth covering here. The most interesting pattern was the continuation of the weak PMI theme, Chinese, Swiss, Norwegian, UK (47.4 vs. 50 exp) and US manufacturing PMI’s all disappointed today. Australian and Swedish PMI’s were slightly better than expected, but both sub-50.

The US October ISM was worse than expected at a barely expanding 50.8, though the internals weren’t particularly poor, as the New Orders Index registered its best reading in 6 months at 52.4 and the employment Index was stable.

Sterling clearly traded more as an anti-Euro than on the data today as EURGBP plunged to its key 0.8550 range support despite a very weak manufacturing PMI

Looking ahead
All eyes on whether the idea of a referendum disappears as quickly as it appeared and if instead we get a Greek snap election with equally uncertain outcome. Risk is trying to make a stand in the early going in the US as there are doubtless bargain hunters out looking for yet another round of official intervention and the inevitable pop it will supposedly bring, though this analyst would prefer to tread easy here and respect the tremendous uncertainty for now. Remember that tomorrow we have an FOMC meeting and Bernanke press conference.