In what has become a familiar plot, US economic news impressed, and Greece inched closer to agreement to receive additional bailout money. Equity markets like this story and stocks rose modestly. Several German officials began hinting they may let Greece default and leave the Eurozone, but it was unclear if this was a new course for Berlin or political bluffing. Perhaps more importantly, Merkel’s late week comments suggested the deal should get done, likely as soon as next week.
S&P 500: 1,361 (+1.3%)
MSCI EAFE: +2.3%
US 10-Year Treasury Yield: 2.00% (+0.03%)
Gold: $1,721 (+0.0%)
USD/EUR: $1.315 (-0.1%)
- Monday – The Greek parliament approved austerity measures demanded for additional bailout funds.
- Monday – Obama released his 2013 budget plan, including raising income and dividend taxes on high income individuals as well as the capital gains rate. The proposals are not expected to be implemented by Congress.
- Tuesday – German finance minister Shaeuble says Germany is better prepared to deal with a Greek default.
- Tuesday – Moody’s downgrades Italy and Spain, but their bond yields do not appear to be significantly impacted.
- Thursday – New US jobless claims dropped more than expected, hitting the lowest level since 2008. Meanwhile, housing starts increased more than expected as did Philadelphia area manufacturing.
- Friday – Congress extended a payroll tax cut through the end of the year.
Stocks keep moving higher, but the S&P 500 is just now approaching its highs for 2011 and remains well below the 2007 peak. While sentiment is improving, we find very few who expect big returns, even though most economic news has been good. This is positive for equities. Stock markets have the best chance for big gains when it is least expected. It is also a warning sign for bond holders.
A small handful of German officials, most notably finance minister Wolfgang Shaeuble, this week said Europe is better prepared to handle a Greek default. This is concerning on one level as it implies Germany may be more willing to take this risk. On the other hand, as we alluded to last week, he is right. The worst case scenario regarding Greece may not be that bad anymore for global economies or stock markets. A firewall seems to have been formed around Italy and Spain, whose interest rates no longer respond violently to every piece of news out of Greece. Whether this firewall is sufficient to prevent contagion in event of a Greek default is unknown. We hope we don’t have to find out, but then again we are not the ones footing the bill for the bailout.