Afternoon analysis 29.12.2014

Greece faces snap election. The euro was stable despite the political developments in Athens. The zloty strengthened after poor performance in the previous week.

Greek parliament failed to elect president for the third time. The government's candidate got 168 votes – less than 180 needed to succeed. As a result, the parliament is to be dissolved and earlier election will be held in late January.

Polls point at Syriza party as a potential winner in snap election. After results were announced, Syriza's leader Alexis Tsipras said that his party will to drop austerity measures imposed by Troika and increase wages in public sector and pensions. Greece obtained 240 billion euro in an exchange for structural reforms after crisis hit the country.

Developments in Greece resurrect anxiety that hit the markets in 2012, when the most indebted country in the euro zone was on the brink of collapse and there was a high probability that the euro zone will fall apart. During that time Syriza vowed to leave the currency union as a way to mitigate crisis and resurge the economy. Currently leaving the euro zone is not in party's agenda, but Alexis Tsipras's plan to increase wages and pensions, and not paying country's debt is not feasible in the euro zone framework.

The Greek economy just battled six year long recession. Although the situations is one of the worst in the European Union, it is consistently improving. Country would be supported by the European Central Bank's government debt purchases program, that is expected to be implemented in the beginning of 2015. Athens would be one of the largest recipients of asset purchases as its cost of lending is among highest in Europe.

One needs to remember, that overgrown social security and public sector were among major factors that pushed Greece into the crisis. And now Syriza proposes to reject reforms and restart social spending. This will lead to next crisis.

The latest developments imposed additional risk for the common currency. The euro will be under pressure from political developments in Greece in spite of a calm reaction just after voting results were announced. The reaction of Greek financial market was more visible – the stock market tumbled even 11 percent and government bond yield surge to 9.50 percent.

Better perspectives

The German ministry of economy said that drop in oil prices will result in 0.2-0.3 percentage point higher GDP growth in 2015. The information was published by Der Spiegel, that cited unofficial sources. Savings from drop of oil price were estimated around 12 billion euro (25 percent less than 2014 expenses).

Low oil prices, imminent launch of government bonds purchases by the ECB and the European investment fund are factors that may result in long-awaited breakthrough in the European Economy. Given solid performance of the US economy and despite somewhat weaker growth in the Asian countries (especially China), the outlook for global economy is rather positive.

Incoming data

Monday's calendar is empty. However, the last week of the year will provide some crucial reports from global economy.

On Tuesday the ECB will reveal its crucial report on money supply. The most important information in this publication is credit demand that is still weak despite the effort of central bank. The ECB introduced record-low interest rates and conducted two rounds of TLTRO. Later this week we will obtain PMI reports and ISM in the US.

Poland PMI report is scheduled on Friday. Index is expected to drop to 51 from unexpectedly high result of 53.2 in the previous month. This report is closely observed by the Monetary Policy Council, thus it has a high impact on the zloty. Any result that in far from market consensus will result in heightened volatility of the zloty.

Zloty's gains

In the previous week the zloty posted significant losses as speculative investors exploited the absence of major financial institutions what resulted in lower liquidity. However, on Monday the zloty rose and recouped significant part of its drop. That reassured the notion, that the last week drop was a speculative move.

Currently, there is no strong arguments for deeper zloty's slump. The economic reports are quite good and expectations for rate change are not sufficient to impact the currency. Thus, the zloty will probably continue to gain during heightened volatility.