North American Wrap: The Greek Canary in the Coal Mine

The Greek Canary in the Coal Mine

Investors in North America have got to be feeling pretty high on the hog of late as everything seems to be coming up roses for the US and its economy.  Yesterday saw the Federal Reserve taper the last part of Quantitative Easing while sounding fairly optimistic about the future, and then today brought about a 3.5% increase in GDP for Q3, which combined with Q2 at 4.6%, was the best 6 month run in growth in about a decade.  In response to all this good news of late US stock markets have been rising ever higher despite the fact that the Fed is essentially leaving the game and tagging in the European Central Bank to institute their version of QE.  Despite all the rosy glass viewing that is going on lately, there is one concern that could be a forbearer of coming calamity; our old friend Greece.

The issue at hand for Greece is the possibility that snap elections could be forced by the main opposition party Syriza if current Prime Minister Antonis Samaras can’t form a parliamentary supermajority in the next four months to replace outgoing President Karolos Papoulias.  As of now, Samaras only has the backing of 155 of the 180 parliament seats needed, and with Greek polls showing Syriza gaining favor, those additional 25 seats may be difficult to secure.  Syriza appears to be holding the cards.

For those who don’t recall, the Syriza party and their leader Alexis Tsipras, are against the ideas of austerity which they feel are largely to blame for the current financial hole in which the nation remains stuck.  Greek unemployment is still extremely high at over 26% and youth unemployment is at a ridiculously bloated 51.5%.  Even though those numbers are improvements from the still higher figures during the European Crisis of 28% and 60% respectively, they still aren’t palatable, and haven’t been improving quickly enough to make the Greek citizenry satisfied.

As the market slowly begins to realize that there is trouble on the horizon in Greece, there is one telltale sign that could tell us that the fear is having an effect; bond yields.  When the European Crisis first started to materialize it was Greek 10-year bond yields that spiked, followed thereafter by Spain, Italy, Portugal, and Ireland (not in that order) that all experience similar spikes which then led to the infamous “whatever it takes” proclamation by ECB President Mario Draghi before the London Olympics kicked off.  Before Draghi delivered those market changing words, the EUR/USD had fallen to nearly 1.20, and then rallied up to nearly 1.40 simply on the promise of action by the ECB.

Well, it’s happening again as Greek 10-year yields have risen from around 5.5% toward the beginning of September to nearly 9% a little earlier this month (Figure 1).  If this spike is a sign of things to come, then the ECB’s initial 1 trillion euros of QE may not be enough to satiate fearful investors, and we could be witnessing the seeds of a second European Crisis being laid.

Figure 1:

Looking Forward

The Bank of Japan will likely be the most visible target this evening as they are the third major central bank to be making a monetary policy decision this week.  Investors have been watching disappointingly at BoJ statements for the last few months as President Haruhiko Kuroda has not hinted at adding to their Quantitative and Qualitative Easing program.  Considering Prime Minister Shinzo Abe has insinuated that another sales tax increase in Japan may be tabled for now, the BoJ might wait to see if that has any effect on growth for the time being.  Therefore, there may not be anything new announced here and the current status quo of JPY pairs rising higher may very well continue.