GROWING UNEASE about the potential implications of the Greek and French election outcomes triggered a sharp weakening of risk appetite. Global equity and commodity prices tumbled amid heightened demand for US and German government bonds.

After holding up reasonably well on Monday in response to the weekend’s events, the mood in the markets deteriorated markedly as doubts increased about Greece’s ability to form a coalition government. The inconclusive Greek poll result raised expectations that a repeat election would need to be held later this year.

“Greece remains in serious political deadlock at a time when it needs political stability the most,” said IHS Global Insight.

Ben May at Capital Economics warned that there was a clear risk that a new election might not lead to a decisive outcome, leading Greece to withdraw from its bailout deal with the European Union and International Monetary Fund and default.

“Such an outcome would not automatically result in Greece exiting the euro zone, let alone the European Union,” he said. “But we think that Greece would also come under huge pressure from policymakers – and perhaps more importantly the markets – to abandon the single currency.”

Dan Greenhaus, chief global strategist at BTIG, made the point that the underlying concern in the markets went beyond just Greece quitting the euro. “The question was – and is – whether a Greek exit exacerbates pressure on other countries to do the same,” he said.

“If so, the stability of the euro zone banking sector will be called further into question.”

Meanwhile, the markets were also still getting to grips with what François Hollande’s victory in France’s presidential election could mean for euro zone policy.

“The election of Mr Hollande may well be a seminal event in the history of the euro zone and, over the next few days/weeks and possibly months, we will see whether he sticks to his intentions to renegotiate the fiscal compact and promote a growth agenda – or whether the reality of the situation and the German position results in him moderating his policies,” said Gary Jenkins at Swordfish Research.

The mood of broad uncertainty in the markets led to initial selling of risk assets becoming increasingly aggressive as the session wore on. Global equities sank to multi-month lows. Not surprisingly, the Greek stock market took a beating, with the Athens General index sliding 3.6 per cent to its lowest point for about 20 years.

Commodity prices suffered similarly sharp losses as the euro zone’s troubles rekindled concerns over global demand and fuelled fresh strength for the dollar.

Brent crude oil was down $2 a barrel and threatening to fall below $111, while copper slid to a two-week low and gold was hovering at the $1,600 an ounce mark.

Demand for highly rated government bonds grew as equity and commodity prices lost ground. The yield on the German Bund touched a fresh record low as it fell three basis points to 1.55 per cent, while that on the 10-year US Treasury shed 4bp to 1.93 per cent. – (Copyright The Financial Times Limited 2012)