By Carlos Guillen
Equity markets are showing signs of a bounce off support despite the fact that not much has been resolved in reference to the rapidly approaching fiscal cliff and to the increasingly unstable debt situation in Greece. The Dow Jones Industrial Average has bounced off support at the 12,750 level, and it is struggling to gain momentum, but investors continue to keep an eye on Greece and are still worried about US failure to stop the automatic tax hikes and spending cuts scheduled to trigger in the beginning of next year.
Over in Europe, Greece has still not received the cash it needs to prevent default. In spite of the fact that the nation has passed two very important austerity measures within a week's time in order to obtain the next tranche of funds, amounting to 31.5 billion euros ($40 billion), European finance ministers appear to be rethinking the requirements they had originally imposed on Greece. At the moment there appear to be some disagreements between the International Monetary Fund (NYSE:IMF) and euro area finance ministers on the timeline given to Greece to reduce its debt level. Today, euro area representatives postponed the goal of getting Greece's debt down to 120 percent of GDP by two years, until 2022; IMF Managing Director Christine Lagarde disagreed with the decision and said Greece should reduce its debt burden down to 120 percent of its economic output by 2020, as originally scheduled. While this disagreement caused some commotion, Jean-Claude Juncker, leader of the euro zone's finance ministers, said that the deadline would likely be changed to 2022. As it stands, all indications are that a decision to release the next tranche of funds to Greece will be reached on November 20, when euro finance ministers meet.
As a result of this continuing instability in Europe, German investor confidence unexpectedly declined in November. According to the Zew Center, German investor confidence fell to minus 15.7 from minus 11.5 in October, representing the first drop since August and landing below economists' forecast of an increase to minus 10. The drop in confidence is one more bit of evidence that suggests the debt crisis is finally taking its toll on Germany. Exports, factory orders and industrial production all fell more than forecasted in September.
Despite that there is still no resolution to the fiscal cliff here at home, it is likely that investors have already built-in their fears into stocks at the moment, and a bounce in equities is likely to hold given all else remains constant. We believe a resolution is highly probable.
Greece Pushes Market Around
The market is moving higher today, but the reasoning is somewhat dubious. There is the positive news from Home Depot (NYSE:HD), which showed the Company beat expectations in its most recent quarter and sees a continued turnaround in the housing market. Then you have the talks surrounding the fiscal cliff, and the hopes that a compromise will be reached, or at least that some sort of deal will prevent the economy from falling off a cliff. The talk about letting the economy fall to score political points is stupid and definitely misinformed.
It seems that the biggest positive today was the news out of Europe. Greece has been on the hot seat for the past few weeks (even more so than the past year), as the ECB and IMF were considering holding back the next tranche of bailout funds. Parliament passed the next wave of austerity measures, but still the ECB is withholding the next 31.5 billion euro payment. As a result, Greece was on the verge of defaulting on a 3 month Treasury bill that matures this Friday. Greece sold €4.063 billion of Treasury bills at Tuesday's sale which helped to stave off a potential default on €5 billion ($6.35 billion) worth of three-month bills sold back in August.
The ECB no longer accepts Greek debt as collateral against loans. However, it has allowed a special facility for Greek banks to pledge debt securities with the Greek central bank. These loans carry a higher rate of interest. The Greek central bank then gets funding against those pledges from the ECB's Emergency Liquid Assistance program, a facility set up to help countries with severe financial difficulties. It seems that the Greek Central Bank is being forced into loan sharking by the ECB and IMF.
There are also rumors of a Spanish bailout in the works. Spain had fallen into the background as the morass that is Greece has stolen the headlines. Spanish yields dropped from a six week high following news that German Finance Minister Wolfgang Schaeuble signaled Greek aid payments may be bundled into a single installment. So Spain is happy to stay in the background while all the attention is put on Greece. However, the problems persist and after Greece's bailout (which I expect to come in the next week), the appetite to help and bailout another country could be diminished.