Greek vote may give markets brief relief

By Caroline Valetkevitch, Reuters

Updated 4:27 p.m. EDT: NEW YORK -- ?Early results from Greece's elections on Sunday showed pro-bailout parties are on course to win a slim majority, which may give markets some respite, but any coalition's majority looks set to be narrow and may lack the stability needed to push through painful reforms.?

Whatever the outcome, Europe's problems are far from over as the debt crisis threatens to further engulf the larger economies of Spain and Italy.

Any sign of stresses in markets on Monday morning and investors will be looking for action from the world's central banks who, according to officials, stand ready to intervene if trading becomes turbulent.

At stake in Greece's election, as investors see it, may be the country's future in the euro zone and possibly the future of the currency bloc itself.

The Greek conservative New Democracy party and Socialist PASOK, who broadly back an EU/IMF bailout package keeping Greece from bankruptcy, looked set to jointly secure a slim majority in parliament. SYRIZA, the leading leftist party that pledged to tear up the terms of the bailout package, conceded defeat.

"Most probably they will try to form coalitions and the real question is, with the horse trading how stable is it?" said Doug Roberts, chief investment strategist at Channel Capital Research.com in Shrewsbury, New Jersey. "But right now it's more like kicking the can down the road. Either way you're not talking about a stable situation."

An official vote projection showed New Democracy taking 29.5 percent of the vote, with SYRIZA in second place with 27.1 percent and PASOK third with 12.3 percent.

Because of a 50-seat bonus given to the party that comes in first, the result translates into 128 seats for New Democracy and 33 seats for PASOK in the 300-seat parliament.

Roberts said whether or not central banks intervene will depend on markets next week. "If the markets start heading south I think they will be forced to," he said.

In one of the few markets trading shortly after the official election projections in Greece, the euro hit a three-week high against the U.S. dollar in early Australasian trade, rising to around $1.2730 according to Reuters data from around $1.2655 late in New York on Friday.

But markets have had a tendency to react positively to political developments late Sunday and early Monday only to quickly reverse. That was the case last weekend after the EU announced a 100 billion euro bailout for Spanish banks.

Weeks of worry over the potential outcome of the Greek election have prompted a number of central banks to prepare for market problems.

Central banks from major economies are ready to take steps to calm markets should the outcome of the Greek elections create a market storm, officials from the Group of 20 told Reuters.

Among them, European Central Bank President Mario Draghi said the ECB was ready to step in and fund any viable euro zone bank that gets in trouble. The Bank of England on Thursday announced a $155 billion (100 billion pound) offer of loans to banks.

Group of 20 leaders kick off a two-day summit in Mexico on Monday and the rest of the week is not likely to be any quieter.

The Federal Reserve is due to release a policy statement on Wednesday at the end of its two-day meeting, and the steady flow of sovereign debt warnings and downgrades is likely to continue.

In another sign of investor nervousness, the CBOE Volatility index <.VIX>, Wall Street's fear gauge, was up for much of Friday even as stocks rose, although the VIX closed lower. Stocks and the VIX typically have an inverse relationship.

Many investors have been trying to prepare for the worst.

"People have been hedging their positions aggressively over the past two weeks heading into this weekend," said Alec Levine, a derivatives strategist at Newedge Group SA in New York.

"No matter what happens (this) week, we will return to a massive game of chicken between the newly elected Greek government, whoever that may be, and the EU, specifically Germany."

THE FED AHEAD

Despite the fears, stocks ended the week on a positive note, marking a second straight week of gains. The benchmark Standard & Poor's index <.SPX> is now up 6.8 percent for 2012, though still well off its highest levels of the year.

Part of what has spurred optimism for stock investors in recent weeks has been the hope that the Fed and other central banks would act to provide more economic stimulus. There has been continuing speculation over whether the Fed will engage in a third round of quantitative easing.

"We do think that expectations of QE3 will drive the market one way or the other," said Omar Aguilar, chief investment officer for equities at Charles Schwab Corp, in San Francisco.

But the fact that the Fed has made no recent changes to policy could mean the economic data policymakers are seeing is "not as bad as everyone thinks," Aguilar said.

Also ahead of the vote, Russell Indexes said certain events in Greece could mean changes in its indexes through implementation of its "financial crisis" rule. Its indexes include the Russell Global Index.

ON RATINGS WATCH

Adding to investor nervousness has been a slew of recent ratings cuts.

Among the most recent, Fitch Ratings on Friday downgraded Egypt's sovereign credit rating deeper into junk status. On Thursday, Egan-Jones cut France's sovereign credit rating.

Many investors see that trend continuing as agencies try to gauge the impact of the euro zone and other problems on the global economy.

"We're probably going to see more of it," Peterson said.

Below, CNBC's Sue Herera looks ahead to what are likely to be next week's top business and financial stories.

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