[dropcap]M[/dropcap]arkets held firm amid swirling uncertainty surrounding Greece and the future of Europe. Global stocks posted gains for the week, though international stocks were flat for US investors due to a rising dollar. At a mostly non-eventful summit, European leaders simultaneously reaffirmed their desire for Greece to remain in the Euro, and suggested they are increasing contingency plans for an exit. US home prices posted the strongest results in years. Facebook’s problematic IPO caused a media frenzy and its stock dropped sharply for the week. Treasuries and gold declined modestly.
S&P 500: 1,318 (+1.8%)
MSCI EAFE: (-0.1%)
U.S. 10-Year Treasury Yield: 1.74% (+0.03%)
Gold: $1,572 (-1.2%)
USD/EUR: $1.251 (-2.0%)
- Monday – Stocks rose as the Group of Eight leading industrialized nations affirmed a desire to keep Greece in the Euro and weekend polls showed strength for conservative pro-austerity parties in Greece.
- Monday – Facebook stock dropped 11 percent on its second day of trading.
- Tuesday – Former Greek Prime Minister Lucas Papademos said it was unlikely Greece would leave the Euro, but acknowledged that it was a real risk.
- Tuesday – Iran agreed to let nuclear inspectors into the country – a move seen merely as stalling by many.
- Tuesday – Dell reported disappointing earnings and revenues as PC sales slumped.
- Wednesday – The Spanish government announced it would provide 9 billion euros to cover Bankia’s provisioning needs.
- Wednesday – U.S. home sales for April rose 3.3 percent from March and 9.9 percent from a year ago, suggesting the U.S. housing recovery is gaining momentum.
- Thursday – Italian Prime Minister Mario Monti said a majority of European leaders back the idea of joint euro-bonds and suggested they may be introduced “soon”. Germany continues to strongly oppose the idea.
- Friday – Standard and Poor’s lowered the credit rating of Spain’s four largest banks.
- Friday – The International Atomic Energy Agency said it found traces of uranium enriched to 27 percent in an underground Iranian bunker.
Stocks continue to rise whenever there is no particularly bad news out of Europe, indicating the rally earlier this year can continue under all but the worst outcomes in the Greek saga. However, uncertainty reigns and problems in Spain are accelerating.
This week’s summit was uninspiring. A major subject was euro-bonds. For obvious reasons, nations paying higher interest rates favor them and nations paying lower interest rates strongly oppose them. It is hard to see how there can be agreement unless Germany and other stronger countries are given significant new powers in exchange. The European Union was born largely to prevent a repeat of the horrors of two world wars. Making Germany the de facto controller in a peaceful fashion is not an acceptable alternative for most Europeans. Germany may be persuaded into some form of joint debt, but it is difficult to see euro-bonds as a near-term viable solution to current problems. We hope that behind the scenes, Europe is preparing a “Bazooka” capable of preventing contagion and convincing people bank deposits in Spain, and elsewhere, are safe. To be credible, it seems it must involve expanding the ECB’s power.
Overshadowed by Europe, the strong housing data in the U.S. is very bullish. It is hard to overestimate the benefits to the U.S. economy of increasing home prices and transaction volume.
On the other hand, it is concerning to see Iran making headlines again. Especially with the presidential election approaching, it seems likely the US will be forced to increase pressure. If the U.S. and/or Israel choose a military option (impossible to know how likely this is), it probably has to happen this year or early next year. Talks resume in mid-June. Unless they are surprisingly fruitful, capital markets will likely become more tuned-in to this issue.