[dropcap]M[/dropcap]arkets were relatively calm before Greece’s Sunday election. Stocks rose for the week on hope European governments and central banks will find a way to keep the Eurozone intact and functional. Bond markets told a different story. Spanish and Italian bonds yields hit euro-area records and Treasury yields decreased. U.S. economic data pointed to weaker growth. Coupled with lower inflation data, it fueled speculation the Fed will increase stimulus measures.
S&P 500: 1,342 (+1.4%)
MSCI EAFE: (+2.0%)
U.S. 10-Year Treasury Yield: 1.58% (-0.05%)
Gold: $1,624 (+1.9%)
USD/EUR: $1.265 (+1.1%)
- Monday – Initial euphoria over a Spanish bank bailout faded quickly. Spanish bond yields ended the day sharply higher.
- Monday – Apple unveiled its new operating system and new Macintosh computers.
- Tuesday – The ECB backed a European Commission plan to guarantee bank deposits.
- Thursday – Stocks rose on speculation central banks are preparing to provide additional liquidity to banks if the outcome of the Greek election causes tumultuous trading.
- Thursday – US jobless claims for the previous week unexpectedly rose, increasing the odds of further Fed stimulus.
- Thursday – The Bank of England announced plans to flood banks with cheap funds to spur growth and provide insulation from the ongoing crisis in the Eurozone.
- Thursday – Egypt’s high court unexpectedly dissolved parliament, adding uncertainty to the countries path toward democracy.
- Friday – Stories surfaced that Microsoft intends to announce plans to sell a tablet running its next version of Windows software.
Rather than the Euro Cup, U.S. Open, or NBA finals, much of the world will be focused on Greek elections this weekend. Like the sporting events, the outcome is impossible to predict.
Markets will have an immediate reaction, but overall the election is likely to prove anti-climactic. If left-leaning Syriza wins decisively, markets will probably drop initially. But the party still must form a government and announce a policy agenda. As in the U.S., it is common to campaign with one message, only to become more centrist once elected. Syriza wants serious renegotiation of the country’s bailout, but it does want to stay in the Euro if possible. The rest of Europe is likely to offer some concession on austerity, but it will be minor. If no compromise can be reached, Greece will likely be forced out of the Eurozone, but it doesn’t have to happen immediately. If there must be an exit, it is in everyone’s interest to make it as orderly as possible.
A win for the status-quo New Democracy party would cause temporary relief but do little to solve Greece’s long term structural problems. Greece still may be forced from the Euro within a year.
In the U.S., another poor jobs report was clearly bad news. Because stocks were up this week, the media jumped on the concept of soft economic data leading to more Fed stimulus as a positive. It isn’t. Further stimulus measures would be increasingly unconventional with increasingly uncertain outcomes.