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It turns out that no result from the Greek election at the weekend was market friendly. After an initial knee-jerk reaction higher in risky assets, sentiment in the market has dwindled today and EURUSD has given back all of its post-election gains, before finding support at 1.2620, where this cross closed on Friday.

Although Greece elected a pro-bailout party, events in Athens are on the back burner at the start of a new week. It seems likely that New Democracy could form a fragile coalition with their former arch rivals Pasok, who came in third place in yesterday's election. Although Pasok said it would not form a government with New Democracy last night, it appears likely that it will put partisan concerns to one side to form a unity government, which may help Greece secure its next tranche of EU bailout funds before it is projected to run out of cash in mid-July. In the short-term the Greek political crisis is under control (as long a coalition can be formed in the next 9 days, which we put at an 80% probability). The bigger concern now turns to Spain and the structural issues that still plague the currency bloc.

The Greek election does nothing for Spain

Spanish bond yields rose to fresh euro-era highs at the European open and remain above the critical 7% level. This increases the risks as Madrid tries to auction both long and short-term debt on Tuesday and Thursday this week at 0930 BST. So what did the Greek election change to cause more pressure to build on Spanish bonds? The main risk is that a positive election result has eased pressure on the EU authorities to make long-term radical changes to the European Union. Essentially without fiscal, banking and political union (combined with the ECB taking on the mantle of becoming the lender of last resort) there is still the chance that a member of the Eurozone will leave the currency bloc. Thus, the market is not reducing its pressure on the Eurozone authorities to come up with comprehensive solution to this crisis. Piecemeal can-kicking is not enough anymore, and thus if the global and European authorities can't come up with the correct mix of long-term structural change in the currency bloc and short-term liquidity support then we could see a sharper decline across risk assets.

The time for action is now

There has been a deluge of headlines to digest today. Here are the most important in our view: The Spanish budget minister called for political, fiscal and banking union for the currency bloc, the EU draft summit has been released to Bloomberg and it urges the ESM bailout fund to be launched by July 9th, a rapid study of cross-border bank proposals as well as stressing efforts to restore growth and pledge all levers against this crisis when they meet on 28/29th June in Brussels. The lack of detail especially on the growth front is worrying as the document says there is no agreement yet on the size of the capital boost to the European Investment bank, which is deemed vital to get a Marshal investment plan into Europe's periphery to try and boost their flagging economies.

Market Moves

The markets are not in a generous mood, especially in the bond market. Risk-off is back on, and this is reflected in the widening of peripheral- German spreads. Last week German bond yields started to rise as investors priced in the prospect of radical change to the currency bloc that could impact Germany's credit rating. However, today investors are rushing into safe havens. 1.2745 (a key Fib retracement level and major resistance zone) thwarted the euro bulls, who used the move higher in EURUSD to sell the cross at better levels. This has affected other risky crosses, with the yen and the dollar being bought as investors' rush into safe havens. AUDUSD had a strong rally earlier, but has sold off sharply this morning (unsurprisingly since it has a high beta to risk). It has found some support above 1.0060, and is starting to look oversold on a very short-term basis. Resistance lies at 1.0125.

European stocks are being led lower by the banking sector. The Eurostoxx index was thwarted at 2,220 - the 50-day sma - which is now key resistance. US stocks are also poised to open lower, according to the futures market.

Ahead today there is not that much economic data to distract the markets so watch out for headlines from the G20. With bond yields in Spain this high, it's hard to see risk sustaining much of a rally, especially in Europe.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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