Risk Markets Dive On Greece Default Risks, Euro In Range

Risk markets tumble sharply again as worry on Greece intensifies. Asian equities are broadly lower even though the Dow pared much of the mid-session loss and closed merely down -0.6%. Commodity currencies are hardest hit this week with AUD/USD back pressing parity for the moment and USD/CAD is back above parity already. Nonetheless, European majors are relatively steady with EUR/USD staying above 1.2954 temporary low while USD/CHF is also held below 0.9269 temporary top. EUR/JPY and GBP/JPY are also staying in this week's tight range. The Dollar Index breached 80 psychological level again but struggles to stay above there so far.

There are now talks that Greece leaving eurozone is somewhat inevitable and could happen as early as this summer. After New Democracy leader Samaras failed to form a coalition government on Monday, Syriza leader Tsipras was given the mandate by president Papoulias to do so on Tuesday. Yet, Tsipras, with his anti-austerity stance, forges to form a coalition with leftist parties. And, one of the major basis of the coalition Tsipras seeks is "abolition of the debt deal with foreign creditors and all related laws that have led to pension and wage cuts." Tsipras emphasized that “the popular verdict clearly renders the bailout deal null.” Analysts, though, criticized Tsipras' proposals as unrealistic and expect there won't be a left-wing coalition.

And should there be no government formed after the negations, president Papoulias would appoint an interim government and call new elections in 30 days, which lead to instability. Most importantly, Greece will need to repay interests of bonds due in May while laying out the plan to cut EUR 11.5b from 2013, and 2014 budgets before getting the next tranche of bailout fund from EU/IMF. German Schulz, president of European Parliament, has already warned that the austerity agreements must be "respected" and there is no room to renegotiate. And it's clear that Germany's stance is "no cuts, no aid" for Greece. Samaras criticized Tsipra is having "no interest in ensuring the European identity" and leads "directly to default and exit from the euro."

Meanwhile, Ireland is also facing much uncertainty ahead of a referendum on May 31 on Europe's fiscal treaty. There are talks that elections result in France and Greece showed and turn in tide in Europe for going out on austerity. Ireland's third largest party Sinn Fein rode on the wave and urged people to say "no" to the EU treaty. Italian prime minister Monti also faces an uphill battle as local election results showed a swing to center left as anti-austerity mood grows.

On the data front, UK BRC sales monitor dropped -3.3% yoy in April. Japan leading indicator rose to 96.6 in March. German trade surplus was unchanged at EUR 13.7b in March. US wholesales inventories will be released today. Nonetheless, main focus will remain on development in Greece and eurozone.