A combination of fears around the outcome of the Greek elections on Jan. 25 and the continuation of the fall in oil prices kept investors nervous as the year began. They sought shelter into safe treasuries, pushing Eurozone bond yields ever further into uncharted territory.

The decline in oil prices has hurt energy stocks

Oil and Greece create confusion

Source: Thomson Reuters Datastream (01/01/2014 – 09/01/2015)

Grexit fears intensified…

Greek Prime Minister Antonis Samaras has dissolved the parliament and called for general elections on 25 January after he failed to persuade lawmakers to back his candidate for head of state. Investors worried that a victory by the leftist opposition party Syriza on Jan. 25 could yield a leftist government opposed to European-imposed austerity and drive the country out of the Eurozone in a “Grexit”.

…but are not our base case

True, the Grexit probability has risen but it is not our base case. The result would be devastating for Greece and hence is an incentive also for Syriza to stay within the Eurozone. Contagion to the rest of the Eurozone should remain contained thanks to the existing firewalls. Of course, this is not 100% sure as these firewalls have not yet undergone such a serious test.

Oil prices decline further

Crude oil prices continued to slide in the first days of 2015. Oil prices are in the process of testing US shale producers’ breaking points following the removal of the OPEC price floor. Downside pressure on prices remains severe as US oil output keeps rising and subdued global growth weighs on demand. Analysts say it could take months for the global glut of oil to shrink as producers will be slow to cut back on drilling and consumers won’t change their buying habits right away. Further downside can therefore not be excluded but positioning has become stretched in light of a likely medium term recovery.