Given Hurricane Sandy and all of the economic data and earnings releases that were compressed into a shortened week this week, markets didn't move much.
With presidential elections in the U.S. and a critical vote in Greece, the week ahead is going to be even bigger, and markets are going to have even more to digest in a short period of time – event risk is back.
In a note titled Dress up for next week's events, BofA rates strategist Max Leung writes this morning that "next week will probably see the largest concentration of risks for the rest of this year," and that "s uch a diverse mix of events, some of them rather binary as politics are involved, makes it rather difficult to position for them via directional trades."
"Instead," Leung writes, "we prefer long [volatility] strategies with little to no directionality."
In other words, no idea which way markets will go – but betting that it's going to get volatile.
Greece faces a critical vote next week in order to secure much-needed bailout aid by November 12.
Leung gives a quick preview of the dangers of the vote:
Greece: Next week, the Parliament will vote on the austerity and structural reform package for the first review of the new program. The risk of a negative vote is real, as both PASOK and the Democratic Left, the second and the third parties in the coalition respectively, are threatening to vote against the package. In addition, the Greek debt sustainability and the financing of the €20-30bn shortfall in the EU/IMF program are issues yet-to-be resolved.
Roubini economist Megan Greene posed the question on Twitter this morning:
Have we ever witnessed such a close vote in the Greek parliament on important measures during the crisis as that which we'll see next week?
— Megan Greene (@economistmeg) November 2, 2012
And Deutsche Bank strategist Jim Reid highlights in his latest note a whole other complication introduced to the Greek situation yesterday:
Back in Europe, the main headline was that the Greek Court of Auditors sees the pension reforms demanded by the troika as unconstitutional, potentially derailing the government’s efforts to push through its EU13.5bn austerity package through parliament next week...broader equity markets shrugged off the headline, but the Athens Composite equity index closed down 5% on the day, and is now down 13% on the week.
Also, Greek labor unions will be staging a massive two-day strike in Athens next week while voters head to the polls in the United States.
The presidential election will be the biggest event of the week, and Leung says "the impact on risk is not immediately clear."
The biggest implications are for how the fiscal cliff gets resolved, and BofA strategist Marcus Huie writes this morning that it all depends on how the many chips fall, which is what is making everything so hard to predict:
If the election results and the prospects of divided government are as close as the current polls suggest, then a quick resolution to the fiscal cliff is even less likely, since neither side would be able to claim a mandate that is unobstructed by opposition control of one of the chambers of Congress.
This is why the results of the individual House and Senate elections are important as well, since these elections could denote the extent of divided government.
Citi currency strategists hit on the same theme this morning, saying given the way markets are positioned heading into the election, the biggest risk is a close race with an unclear effect on the fiscal cliff:
We view most of the recent price action in G10 FX (with the possible exception of the USDJPY rally) as being the result of squaring up ahead of the US election and 18th National Congress of the Communist Party of China. The biggest political risk is the potential that the US result won‘t be known due to the combination of a tight election and re-count/mail-in issues in swing states .
BofA's Leung also says we could get a France downgrade from Moody's next week, which would be another big deal:
Moody’s is yet to conclude its review of the French sovereign rating. The review was supposed to be due by end-October, but it might have been delayed due to the US hurricane. We believe that rating downgrades could be a trigger for a large sell-off in French bonds, which has been well supported in recent weeks by demand from Asian accounts for carry trades, and market expectations of ESM buying (also see last week on the short selling regulations impact on EZ govies).
Meanwhile, Spain is still a mess, and they have a big bond auction next week as well, as Leung notes. His team recommends selling Spanish bonds ahead of the auction on Thursday.
Below is the packed schedule, via BofA (click to enlarge):
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