US Economic Update – 26 January 2015

A strong performance from US markets as ECB fires up the printing presses; all eyes revert to Greece and FOMC

US equity markets got off to a strong start last week as Chinese GDP data emerged stronger than expected and expectations built ahead of the ECB’s press conference on Thursday. However, North American indices weakened during the closing hours of the week as investors began to reduce risk ahead of Greek elections at the weekend.

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European election outcome and implications

On the European continent, the opening of the new week saw markets awaken to news that the far left SYRIZA party had swept to victory at national elections in Greece, with the party coming within two seats of an outright parliamentary majority. The after effects of this will be a key theme for investors across the globe throughout the week.

This poses a risk to markets across the board going forward for several reasons. First of all, the party has been elected on promises that it will dial back the clock on austerity and restore “dignity” to ordinary Greek citizens after five year of “humiliation”.

This sets the new party on a collision course with the “Troika” of lenders who, so far, have outright rejected the notion that Greece could renegotiate the pact that it has with its creditors.

Should the new parliament in Greece prove unable to reach a compromise with the European Commission, the Germans, the IMF and the ECB; then the nation could find itself sleepwalking toward the exits in terms of its European Union and euro membership. This is the first and foremost risk facing investors as any move by Greece toward the exit would reawaken fears of a euro-zone disintegration once more.

Secondly, the very fact that an “extreme” party has been elected within Europe is bound to set some politicians, policy makers and investors on edge as it could easily be interpreted as a broad precursor to a greater political shift across Europe. One which illustrates broad public disappointment and disillusionment with the European political elite and the way in which the current system of the “Europe” actually works.

This has the potential to create long lasting volatility in 2015 as several other key nations move toward their own national elections later in 2015, most notably; the UK and Spain.

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Looking ahead

Looking ahead we see the week as likely to be dominated by a drip feed of news relating to the new government in Greece as horse between the southern European nation and its creditors gets under-way.

In addition to this, markets will also focus closely upon the most recent FOMC statement which is due for release on Wednesday, as well as the Q4 US GDP figure which is due out later on Friday. The key points here are whether or not the pace of growth remained robust into the final quarter of the year, as well as policy maker sentiments toward interest rates.

While it is not possible to predict the exact outcomes of the week’s releases, we do see it as highly likely that volatility will increase throughout the weeks ahead and therefore, present both risks and potential rewards for investors.

For further information relating to our assessment and outlook for the evolving Greek situation, see our European Economic Update – 26 January 2015.

Dow Jones / 10 Minute Intervals

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