The past weekend was a huge one for European markets as a number of key elections took place. In France, Francois Hollande edged out incumbent Nicolas Sarkozy to push the country further left along the political spectrum, while Greece experienced a more uncertain result in its parliamentary vote.
The troubled country rejected many of the main parties as citizens took to far right and far left groups this time around. This shift to the extremes was seen as a sweeping rejection of those who led the country into austerity programs as Greece has failed to recover from the massive budget cuts and remains mired in a low growth, high unemployment environment (read Pain In The Spain ETF Continues).
This rejection of the mainstream had a very negative impact on the country’s stock markets as many are forecasting that a coalition government will not be able to form and that another election may have to be held in two months time. Given the stakes in Europe and the growing fear of a possible exit from the euro zone by Greece, this uncertainty wasn’t welcomed news for stocks to say the least.
"Financial markets loath uncertainty, and so the reaction seen to the elections makes a great deal of sense," said David White, a trader at Spreadex.
As a result, the main way to play the Greek economy in ETF form, the Global X FTSE Greece 20 ETF (GREK - Free Report) , was down as much as 10% in early Monday trading but was in the red by about 7.7% at time of writing. This also came on outsized volume for the product as trading reached the daily average by about 11 am Eastern time.
The product is now down about 8% so far this year, marking a huge reversal for the once surging fund. In fact, GREK was up about 30% in the first month of the year representing an incredible run for the beaten down market. Obviously, this surge wasn’t meant to last as the product promptly fell back to earth over the next two months, pushing it close to its lows since the ETF launched in December (read Global X Debuts Greece ETF).
Given the extremely negative reaction by the markets to this election, it will be interesting to see what happens next in the Greece ETF. It seems highly unlikely that parties so far apart on the political spectrum will be able to agree on enough to form a coalition, implying that another round of votes could be likely in the near future.
Yet, even if another vote is needed, it seems doubtful that the main parties will be able to recoup that much of their losses. The sentiment against austerity is too strong and a return to this philosophy probably won’t be the result of any vote in the nation (see more on ETFs at the Zacks ETF Center).
Thanks to this, political risk could be a huge problem going forward in Greece, especially if it appears as though the troubled country may be without a coalition government for some time. If this dreaded scenario takes place, look for not only GREK to falter, but for other ETFs representing larger European nations—which have a lot to lose as well—plunge as a result of this heightened risk and continued uncertainty in the health of the common currency bloc.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>