The movement of European shares since late December and Greek shares over the last three weeks seems to indicate an expectation that the region will find a way out of its tangled mess of credit and economic issues. However, Greek politics and partisan disgust with severely punishing austerity is now portending to undermine nascent gains.
Since about December 19, the Euro STOXX 50 Index has drawn a clearly defined trend line higher. European stocks have less perfectly mirrored the rise in U.S. stocks that began last October. The iShares S&P Europe 350 ETF (NYSE: IEV) gained 15.9% from the December 19 close through February 7. The Vanguard European ETF (NYSE: VGK) is up 16.1% after adjustment for dividends. The newly created Global X FTSE Greece 20 ETF (NYSE: GREK) has soared 42% over that same span, due to Greece's greater dependence upon resolution.
Individual stocks sensitive to regional developments have performed exceptionally well. The shares of National Bank of Greece (NYSE: NBG) have more than doubled, rising 118% from December 19, through the February 7 close. Deutsche Bank (NYSE: DB) shares are up 28%, while the holders of Societe Generale (OTC: SCGLY.PK) have scored a 53% gain, though disrupted by the downgrade of France. Indeed, European shares have overcome the broad reaching downgrade by S&P, continuing higher this year on rising confidence for economic and organizational survival.
These nascent gains follow great pain borne by Europe in 2011. The aforementioned Vanguard ETF shed 16.2% in 2011 through the December 19 trough, after adjustments for dividends and splits. Likewise, the individual shares of European companies fared poorly. For example, UBS (NYSE: UBS) lost 31% of its value in 2011 through December 19, after adjustments, while Banco Santander (NYSE: STD) shed 27%.
On Wednesday, most of these relative companies and indexes are trading in the red, as doubts are resurfacing. With Greece finding the bar raised as its revenue is impacted by the effects of austerity, the troika is pushing for goals to be reached before issuing more capital to their pained ancient neighbor. However, Greek politicians are facing crowds that remember their promises that no new austerity would be instituted, and with elections just months away at minimum, they have all the reason to jostle their European brothers for a break. Unfortunately, it is becoming apparent that a vast divide separates Greece and the troika, a disconnect due to the distance between the raged Greek people and the separate interests of the constituents of European politicians.
Thus, the confidence that allowed European shares to recover a portion of their losses in the early going of 2012 is at risk of being undermined. Indeed, at least until Greek Prime Minister Papademos is able to secure the backing of the rival Greek political parties, European shares should soften on the exposed frailty upon which nascent confidence has been built. How the tested and exhausted Greek people react to any broken promises that issue more penalties their way could likewise change the course of European and relative sensitive shares. That risk extends through elections, but could interrupt global financial market stability beforehand.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.