Papandreou does an about-face

Greece continues to dominate the headlines and risk sentiment. Greek Prime Minister Papandreou has now withdrawn his call for a referendum on Greece’s membership in the Eurozone after the opposition announced that they will support the terms of the October 27 austerity package. French President Sarkozy breathed a sigh of relief and expressed his enthusiasm for the steps taken by the opposition party. On the other hand, the yield on 2-year Greek government bonds broke 100% suggesting that investors are anticipating a 100% chance of a Greek default.



Furthermore, it is looking increasing like Papandreou could lose the confidence vote later today after another member of his party resigned, bringing his majority to just one. However, unnamed newswires have reported that he now has the support of only 110 parliamentarians and not the 151 he needs. If the confidence vote fails it is looking like the reins could be taken by a unity government, which appears to be under construction right now. The interim government could in theory take over quickly without the need for immediate elections. Nevertheless, it is unclear whether a creation of a unity government would led to Greece receiving the sixth tranche from the EU/IMF before it runs out of cash, nor whether it would be supported by the opposition party.



Elsewhere in Europe, ECB President Draghi surprised the market when he cut interest rates by 25bp. His statement that followed the meeting had a fairly dovish tone as he highlighted the potential for Europe to slip into a mild recession. ECB Governing Council member Mersch went even further and declared that the Eurozone is practically in freefall.



Despite these dovish comments and the uncertainty surrounding Greece risk still managed to rally overnight. The Dow Jones, S&P 500, FSTE 100 and Dax closed 1.76%, 2.20%, 1.12% and 2.81% higher respectively. The rally continued in Asia with gains of around 2% on average for Asian equities at the time of writing.

In Australia, the RBA’s Quarterly Statement on Monetary Policy was infused with a fairly dovish tone. They cut their growth forecast for the next couple of years to +4% and reaffirmed their belief that inflation will remain within the targeted 2-3% range. Following the release the Aussie slid around 39pips, dropping below 1.0300.

Heading into the London Session investors will be keenly awaiting the results of the Greek confidence vote, NFP and the results of the G20 summit.

Source: Forex.com

04.11.2011