Risk Markets Tumbled On Greece Uncertainties, More Sell-Off Ahead

Global risk markets tumbled last week as political uncertainty in Greece raised the odds of the country leaving eurozone. European majors dropped against dollar and yen, with EUR/USD broke below 1.3 psychological level. But aussie and kiwi were even weaker on risk aversion. The Dollar Index broke 80 psychological level and the technical development favors further rally in near term. CRB Commodity Index broke recent down support of 292.39 to resume the larger down trend. Stocks were relatively resilient as the Dow was only down -1.6% last week. But a sell-off in equities could accelerate if the Dow breaks 12710 support in near-term. As uncertainty in Greece continues, risk markets will remain pressured and be vulnerable to further downside.

The situation in Greece is that the pro-austerity major parties, New Democracy and Pasok, failed to secure a majority in last week's parliamentary election. New Democracy, then Syriza the anti-austerity party, and then Pasok took turns in trying to form a coalition government but all failed. Greek President Papoulias will now highly likely announce another election in June to solve the deadlock. According to the latest polls, Syriza is the front runner to win the next election and they're know to reject EU/IM bailout terms of tough austerity. EU officials sound rather straightforward that Greece should adhere to the bailout commitments, or there will be no fund provided and Greece should leave eurozone. And some analysts said that the question is not whether Greece will leave, but when. Some expect the Greece exit to happen as early as this summer.

A major question is there is no mechanism for a country to leave eurozone. It's believed that EU countries are much well shielded from the impact from a Greece exit comparing to a year ago. But there is still much doubt on the impact on investors' confidence in the area, on contagion risks as well as on the economy as a whole. Germany tried to downplay the impact as finance minister Schaeuble said that there are "built-in protective mechanisms" in the eurozone and the risk of effects on other countries have be reduced. Schaeuble said the "eurozone as a whole has become more resistance."

However, the rating agency Fitch warned that in event of Greece exit, " the sovereign ratings of all eurozone member states would potentially be at risk." It would likely place sovereign ratings of all euro area member states on "Rating Watch Negative" as it re-assessed the "systemic and country-specific implications." And, depth of downgrades would "largely depend on the European policy response and its success in limiting contagion, as well as outlining a credible vision of a reformed eurozone." The IIF, the financial industry group that negotiated the debt swap deal with Greece earlier this year, noted that there is "a significant lack of clarity about the impact of the elections on the Greek program." And, it expects new elections as the most likely outcome "with no assurance that the political landscape would be clarified."

Also, note again that the anti-austerity Hollande's win in the French Presidential election also highlighted and change in the tide with the eurozone. The famous Merkozy partnership was broken up and Merkel is left alone to push tough austerity measures inside the eurozone. And the picture is still highly unclear even if we look past Greece.

Spain was somewhat overshadowed by Greece last week. The country said on Friday that it ordered banks to set aside another EUR 30b to cover potential losses on real estate. Banks are also required to place non-performing real estate assets into separate entities and then be charged with selling at market prices. Spain also announced nationalization of Bankia SA, the fourth largest lender in the country. Spanish 10-year yield has held below 6% so far.

While there are many uncertainties in Europe, one thing for sure is that recession is there to continue. European Commission updated growth forecast last week and expect the eurozone economy to contract by -0.3% in 2012 and grow 1.0% in 2013. That's significantly lower than November's projection of 0.5% this year. EU Economic and Monetary Affairs Commissioner Olli Rehn, though, is still optimistic that the recession will be "mild" and "short-lived" and a "recovery is in sight." Rehn said EC is confident about Spain's determination to meet the fiscal target, satisfied with Italy's effort which is on track, and happy with Portugal's measures.

Development elsewhere were overshadowed by uncertainties in the eurozone. Australia retail sales and employment data beat expectations. Canadian employment data were strong. US initial jobless claims stayed below 370k level, which was positive. BoE left rates and asset purchase target unchanged as widely expected.