Risk assets rallied in the Asian trading session on Monday following the victory for the pro-bailout New Democracy Party in the second Greek election.
Markets in Japan, South Korea and Australia all rallied around 1.8% as investors breathed a sigh of relief that left-wing parties had failed to come out on top at Sunday's elections.
S&P 500 futures gained 0.5 percent, while oil rallied $1.27 a barrel. The Euro got a boost, strengthening to 1.2726 against the greenback, but then fell back soon after.
Despite not winning a clear majority, New Democracy, led by Antonis Samaras, will be able to form a coalition government in Greece after beating off competition from the radical leftist SYRIZA party.
“This will inspire a market rally as the New Democracy Party and the socialist PASOK party move to form a coalition,” Megan Greene, the director of European Economics at Roubini Global Economics told CNBC.com on Sunday.
“New Democracy has won, it is a done deal. Moreover, they should be able to form a government with PASOK with a decent majority, which is risk positive,” said Thanos Vamvakidis, the head of European G10 FX strategy at Bank of America Merrill Lynch in London
But analysts said the risk-on trade may not last long.
“Even if it proves slightly more risk positive, I suspect it will be very short lived given the uncertainties over the withheld troika payment from May. Any recovery in prices is an opportunity to reduce risk further” Simon Derrick, the chief currency strategist at Bank of New York Mellon told CNBC.com following the election result.
The troika refers to the three institutions that govern the administration of bailout funds— European Central Bank, the International Monetary Fund, and the European Commission. (A Primer on the Greek Elections).
Paul Donovan, the deputy head of global economics at UBS says nothing much has changed following the result.
“I think it leaves us as we were, with considerable uncertainty,” Donovan told CNBC.com
“Negotiations for coalition, then negotiations for the bailout adjustment. Random political comments will still impact the markets and I would expect a degree of volatility to persist,” said Donovan
“The rally will fade as it becomes clear that we've returned to the unsustainable status quo” said Megan Greene from RGE. “We've entered a period in Greece characterized by cycles of elections, further austerity, social unrest and new elections. As Greeks are increasingly squeezed by austerity, they will place in power a government that is willing to consider alternatives and will choose to exit the euro zone.”
“Given the degree of political instability in Greece, this could happen by early 2013,” Greene told CNBC.com.
Thanos Vamvakidis from Bank of America Merrill Lynch thinks forming a coalition will be difficult.
“I am more concerned about Samaras wanting to be the Prime Minister, which PASOK may not accept.”