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The pound started the trading week at its highest level against the euro since November 2008

The pound started the shortened trading week at its highest level against the euro since November 2008 as the markets digest the election results in France and Greece over the weekend.

Risk sentiment has turned bearish with over £25 billion wiped off the value of Britain’s biggest companies on as the London Stock Exchange reopened for business yesterday as traders dumped risky assets and fled to safety. The FTSE 100 index slid 1.8% to close at its lowest level of 2012, falling 100 points to close at 5,554. Continental European markets followed suit with Germany’s Dax dropping almost 2% and France’s CAC index nearly 3%. Over the pond, the US Dow Jones Industrial Average dipped 1.3%.

In the fx market, the US dollar has now reached its high point of the year to date against the euro and has risen for five straight days against the pound as investors seek the safe haven qualities of the dollar.

Fears continue to grow that Greece will be forced to leave the euro and thus trigger a fresh financial crisis as the euro zone banking sector takes a hit from any default.

Post election, Greece is struggling to form a new government as Greek leaders failed to form a coalition government. The party New Democracy which came first in the elections said yesterday afternoon that it was unable to form a coalition government that would continue to follow the austerity terms promised to the IMF and euro zone as part of the bail-out agreed in March. New Democracy only obtained 19% of the vote while Pasok barely gained 13% leaving both parties unable to form a coalition government to lead the country. New Democracy has already announced its inability to form a coalition which now leaves the second place party Syriza, a coalition of left-wing groups that have pledged to fight austerity measures and captured 17% of the vote with the chance to form a government. The Greek constitution gives the party with the most votes the first chance to form a coalition and, if it fails, then passes the baton on to the next party. Each party has three days to make a deal but New Democracy was quick to throw in the towel. Syriza now has three days to try and get a government together. Its leader, Alexis Tsipras promised to “exhaust all possibilities to reach an understanding, primarily with the forces of the left.”

If a new government is not formed in Greece by 17 May, new elections will have to be called. Greece has only until June to identify €11.6 billion in additional deficit cuts for 2013 and 2014 in order to comply with the bailout terms agreed in March. The next tranche payment from the bail-out is due next month and there are increasing fears that if the EU ends its bailout of Greece, the country will quickly run out of money and could be forced to leave the single currency.

To add to the pressure, the Greek Treasury saw higher borrowing costs and lower demand at its latest bond auction yesterday. Greece sold €1.3 billion euro’s in six month Treasury bills with a yield of 4.69%, up from 4.55% at its previous pre-election auction. Demand, as measured by the bid-to-cover ratio dropped to 2.60 from 2.62.
The markets are also coming to terms with the change of Presidency in France with Francois Hollande becoming the first Socialist President since 1981 after narrowly ousting Nicolas Sakorzy in Sunday’s election. Hollande has promised to renegotiate ‘fiscal compact; agreed within the euro zone and steer France and Europe into a growth strategy, a move that has been repudiated by Germany.

In stark contrast to the rest of the euro zone, data out yesterday showed that German output increased by 2.8% in March from February, well ahead of expectations of a 1.0% rise. This was the biggest monthly increase in industrial production since August 2011.