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WEEK IN FOCUS - 07/05/12-11/05/12

Elections and their outcomes are set to be the prevailing theme of the week as this weekend saw voters enter the polling booths across the globe with results released from France, Greece, UK, Germany, Italy and even Iran. Additionally, US President Obama has kicked off his re-election campaign across the Atlantic, getting off to a poor start as he tries to explain away last week's lacklustre US non-farm payrolls reading. Elsewhere, the anti-austerity backlash is now becoming clear even in Brussels, as EU's Rehn turns heads with comments calling for further infrastructure spending and fringe political parties across the continent garner attention with their growth-priority mandates.

With Francois Hollande winning the French Presidency, the Republic will see its first socialist government since Mitterand's eventful time in office ending in 1995. Sarkozy's loss spells the end of the partnership between himself and German Chancellor Merkel that many heralded as the face of European austerity. As such, Merkel now stands alone fighting for her headline policies of fiscal responsibility and austerity across the Euroarea. Following the official confirmation of the new French leader, markets will be looking out for any clues as to whether Hollande can deliver on his pre-election promises of a return to growth and an elimination of the budget deficit. One of the new leader's speculated policies is a doubling of the Eurozone's rescue system to EUR 1trl and allowing the scheme access to ECB funding. Analysts will now be attempting to decipher the proposals and gain an understanding on how the new rules will trickle through to European growth.

From Greece, the political fallout since their Troika bailout is clear, as voter discontent drives the rise of parties on both extreme ends of the spectrum. Exit poll releases from the country show strong gains for the radically left-wing Syriza party, a party that has dubbed the externally-imposed fiscal rules as 'barbarous' and rejected the conditions. The collapse in vote share for New Democracy and PASOK will do little to instil confidence in the country's progression since their credit event, so markets will be looking keenly for the final results from Greece, as a governing coalition may not be viable.

This Thursday's BoE monetary policy announcement may come under increased focus with last month's minutes revealing a curious hawkish turn for the bank's arch-Dove Posen. Data from the UK coming into the meeting has been particularly poor, with official statistics showing a technical recession. As such, some major institutions have changed their forecasts, and now expect the BoE to expand their asset purchase fund by up to GBP 50bln. However, on the whole, analysts are sticking to their estimates, and expect the central bank to conduct no further easing at this month's meeting.

The Spanish banking system remains caustic as markets still look out for any commentary regarding a proposed Spanish bad bank. Last week saw reports of unofficial discussions between officials quickly denied by the Spanish government, but investors are aware that the topic is definitely playing on the minds of ministers. Analysts have estimated a EUR 140bln writedown of real estate loans would be necessary for such a plan, and doubts have arisen over whether the banking sector could withstand such a provision, with the exception of the larger cap names of BBVA and Banco Santander. Any commentary regarding the concept will have markets keeping a very keen eye on the Spanish 10-yr government bond yield as well as the European financials.