Coming few days key for markets

Anti-austerity Syriza Party leader Alexis Tsipras is on a collision course with the rest of...
Anti-austerity Syriza Party leader Alexis Tsipras is on a collision course with the rest of Europe. Photo by Reuters.
Financial markets around the world, but particularly in Europe, are set for a rocky ride this week as Greece's anti-austerity Syriza party sets about forming a new government.

Party leader Alexis Tsipras is set to become prime minister of the first euro zone government openly opposed to bailout conditions imposed by the European Union and International Monetary Fund.

The final tally on whether Mr Tsipras can govern alone should be known this morning.

In response to Syriza sweeping to victory in yesterday's election (Sunday in Greece), the euro skidded to a near 11-year low and United States stock futures fell.

The common currency already took a battering on Friday after the European Central Bank unveiled its new bond-buying stimulus programme.

Germany, Europe's biggest economy, has insisted Greece must respect the terms of its 240 billion ($NZ360 billion) bailout deal, which saved the country from bankruptcy but at the cost of bitter sacrifices by the Greek people.

As thousands of flag-waving supporters hit the streets of Athens, some shedding tears of joy, Germany's Bundesbank warned Greece it needed reform to tackle its economic problems.

Craigs Investment Partners broker Chris Timms expected the euro would be sold on any rally. But because the election result was already expected, the pace of the fall in the euro was likely to slow.

The broad consensus in the market was any renewed tension over Greece was unlikely to hurt broader investor sentiment beyond the initial shock.

Unlike at the height of the debt crisis in 2011-12, European banks now had limited exposure to Greece and European policymakers had frameworks to deal with indebted countries, he said.

The possibility of Greece leaving the euro zone, even with the incoming government, was small.

Syriza had three days to form a coalition.

If it failed, the party with the next largest bloc got three days.

The process continued until someone was able to form a government - or until another election was scheduled a month or so later.

''Given Syriza was widely expected to win the most votes, the biggest short-term uncertainty for markets is that a coalition government cannot be formed.

"The prospect of a second election will create additional risks as the IMF cannot disperse bailout funds to a country that has no government.''

That meant the current bailout programme would end in February as scheduled, Mr Timms said. No further funds would be available to Greece at that point to fund its short-term debt.

Beyond those immediate risks, there were still concerns a Syriza win could lead to an impasse with the EU and the IMF over Greece's reform promises.

However, it appeared Mr Tsipras had toned down his anti-euro rhetoric, he said.

The rest of the world news would have less impact on the markets.

The Reserve Bank meeting on Thursday was the highlight of the domestic calendar.

BNZ senior economist Craig Ebert said the Reserve Bank had a lot to try to achieve at the Thursday review.

Within its usual handful of paragraphs, it probably wanted to come across as less committed to the clear policy-tightening path it surprised many with at its December Monetary Policy Statement (MPS).

The December statement entailed a 0.75% increase on the OCR starting later this year, ending with an OCR at 4.25% by late 2017.

''However, the bank won't want to give in to the point of encouraging the market's recent eagerness to price OCR cuts based, as it has been, on strong global moves in that direction.''

If the market was left debating the central bank's resolve to lift the OCR any further, governor Graeme Wheeler should feel he had struck the right balance, Mr Ebert said.

''Otherwise, we can imagine term retail interest rates will carry on with their recent re-plumbing of lows.''

This week's OCR meeting stood out as particularly important regarding market reaction and bias - a reason alone for the bank to stick with its December MPS line: ''Some further increase in the OCR is expected to be required at a later stage''.

Any change could be more thoroughly assessed by the Reserve Bank staff for the purposes of the March MPS, he said.

The US Federal Reserve holds a two-day meeting this week but Mr Timms said the statement on Thursday was unlikely to be of any great significance.

No press conference was scheduled for the meeting and there would not be a question-and-answer session with chairwoman Janet Yellen.

Market consensus still suggested the Fed would raise interest rates from zero in June and the Fed's fund rate was expected to end the year at 0.5%, he said.

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