No Worst-Case Scenario in Greece, but Dow Down: What Gives?
Greek elections have come and gone, with the worst-case scenario of an anti-bailout coalition taking control of the government having not come to pass. Yet, after the Hang Seng (INDEX: ^HSI) index in Asia saw a 1.01% rise, Europe is muddling about. London's FTSE is essentially flat while the STOXX50 index (which tracks blue chip stocks across Europe) is down 1.09% as of 9:35 a.m. EDT. Likewise, minutes after opening, the Dow Jones Industrial Average (INDEX: ^DJI) is down 0.49% while the Nasdaq (INDEX: ^IXIC) is seeing a slightly steeper 0.55% drop.
Cold comfort from Europe
The results of the Greek elections show the pro-bailout New Democracy party with 29.7% of the vote while Syriza -- the party which would abandon austerity terms and risk Greece leaving the eurozone -- came in second at 26.9%. That's a crucial difference, because the winning party in Greece is given a "bonus" of 50 seats in parliament. Those 50 additional seats allow New Democracy to form a coalition with the Pasok party that will form a majority of the 300-seat Greek parliament.
Yet, in spite of these results, another trouble spot is rocking markets this morning. In an article last Thursday, I offered three areas for investors to watch this week. Beyond Greek elections, a key area of interest was the yield on Spanish debt. Last week Spanish 10-year bond yields had climbed to 6.96%, just south of the oft-cited 7% line where the country can't afford to finance itself. This morning, Spanish yields continued climbing, reaching a new high of 7.14%. According to Bloomberg, that figure is now a crushing 572 basis points over comparable German yields.
It seems pessimism about continuing problems beyond Greece and into Europe is overriding optimism about Greece being able to muddle through elections that could have spelled its departure from the eurozone.
Taking the long-term view
While many investors were undoubtedly hoping for a market rally after Greece's elections, the key idea to remember is that Europe's ills won't be fixed by a single vote from one of its smaller economies. Greece still has to form a stable coalition and will seek relief from austerity. European leaders set to meet in Mexico this week at a G20 summit still have to solidify a plan of action for ensuring countries like Spain and Italy don't reach a point of no return themselves. Spain appears close, and estimates place a bailout at north of $400 billion. That's a huge figure that would have little support in Germany, a country whose backing of any funding plan is crucial.
With so many pieces still in play, Greece avoids any reckoning today, but there's still plenty of action left this week. So buckle in, stay invested in quality companies, and be aware how market actions could shape your investments. Just don't expect too much long-term resolution. The European story line has plenty of twists and turns ahead.
Take the long-term view
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At the time this
article was published Eric Bleeker owns shares of no companies listed above. The Motley Fool has a disclosure policy.
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