UPDATE ON THE GREEK DEBT CRISIS and BROAD STOCK MARKET (10:45 pm EDT)
Tuesday's deadline for Greece's debt payment of about 1.5 billion euros to the International Monetary Fund has come and gone with Greece failing to make the payment. Does this mean that Greece has defaulted on its debt? Well, technically yes. But apparently the IMF doesn't use the term "default", and instead says that Greece has fallen into "arrears" which simply means the debt is overdue. It is unclear at the moment how much more time this buys for
Greece's debt burdened economy, but some analysts are now saying that the real deadline will be late July when Greece owes the European Central Bank a 3.5 billion euro payment. If no bailout is in place by that time, the Greek banking system could collapse.
It seems that Greek Prime Minister Alexis Tsipras's defiant and uncompromising stance over the last week or two may have been a bluff based on his belief that eurozone officials would acquiesce to his anti-austerity proposals rather than risk a Greek default and Greece's possible exit from the eurozone. If so, EU finance ministers called his bluff by allowing yesterday's "default". Mr. Tsipras seemed much more willing to compromise today. In a letter sent to Greece's creditors, the Greek prime minister said he was now prepared to accept most of the conditions that were on the table before talks collapsed last week and over the weekend. German Chancellor Angela Merkel and several EU finance ministers, however, have made it clear that there will be no more negotiations until after the referendum vote this Sunday when the people of Greece will decide if they want to accept a bailout on EU terms. Despite a widespread anti-austerity sentiment in Greece, most Greek citizens would not want to see Greece leave the eurozone, and recent polls are suggesting that the Greek people are split nearly 50/50 on whether to accept or reject the EU's current bailout proposal. As one can see, this crisis continues to drag on without a clear resolution.
This morning's strong rally in the broad stock market was likely a case of "selling on the rumor" and "buying on the news". In other words, the markets could have already factored in the fear of a Greek default with Tuesday's plunge so that when it actually happened without much hoopla (an "arrears" is less exciting than a "default"), traders decided to get back in. This "recovery" rally, however, was quickly turned back by resistance at the 17,800 level in the DOW. The index then moved down until late afternoon when it was announced that the European Central Bank would leave its current amount of Emergency Liquid Assistance (ELA) available to Greek banks at around 89 billion euros. The ECB also decided to delay making any decisions that could "tighten the screws" on Greece's banking sector. (All of this goes against standard ECB policy as ELA can only be given to banks that are seen as solvent, and Greece's banks cannot be considered solvent under present circumstances. Most analysts feel that these decisions were made because the ECB does not want to be accused of interfering with the referendum vote on Sunday.) The always short-sighted broad stock market seemed encouraged by this news (those Greek banks aren't going down just yet!), and the DOW started rallying again in its last two trading hours. It closed the day at 17,758.
As the reader can tell from this probably too long discussion, the Greek/Europe financial crisis is far from over and could go on for at least several more weeks. Despite Wall Street's optimism at the end of today's trading,
I maintained my short position in the broad stock market because technical signals and the cycle picture at the moment do not seem to support a significant bottom and reversal from Tuesday's low. That could change if the DOW breaks and closes above 17,800. The U.S. Fourth of July holiday falls on Saturday this week so the U.S. stock exchanges will be closed on Friday. Equity markets tend to rally into holidays (which could also explain some of today's investor optimism) so we will watch that 17,800 level carefully tomorrow.
I would like to make one final point to keep in mind when trading a volatile market that is being driven strongly by news events. Remember that Wall Street and the broad stock market do not like complexity, ambiguity and uncertainty and are always looking for a simple spin on issues to drive their buying or selling. While it may be beneficial for us to understand the complexity of a situation like the current Greek debt crisis, we should realize that stock markets are usually driven by emotional reactions to media sound bites and short headlines that may not be giving an accurate picture of what is really going on. For that reason we need to pay attention to the hype as well as the truth of news events to better gauge how markets might react. (Hopefully, we can distinguish between the two.)
Tuesday's deadline for Greece's debt payment of about 1.5 billion euros to the International Monetary Fund has come and gone with Greece failing to make the payment. Does this mean that Greece has defaulted on its debt? Well, technically yes. But apparently the IMF doesn't use the term "default", and instead says that Greece has fallen into "arrears" which simply means the debt is overdue. It is unclear at the moment how much more time this buys for
Greece's debt burdened economy, but some analysts are now saying that the real deadline will be late July when Greece owes the European Central Bank a 3.5 billion euro payment. If no bailout is in place by that time, the Greek banking system could collapse.
It seems that Greek Prime Minister Alexis Tsipras's defiant and uncompromising stance over the last week or two may have been a bluff based on his belief that eurozone officials would acquiesce to his anti-austerity proposals rather than risk a Greek default and Greece's possible exit from the eurozone. If so, EU finance ministers called his bluff by allowing yesterday's "default". Mr. Tsipras seemed much more willing to compromise today. In a letter sent to Greece's creditors, the Greek prime minister said he was now prepared to accept most of the conditions that were on the table before talks collapsed last week and over the weekend. German Chancellor Angela Merkel and several EU finance ministers, however, have made it clear that there will be no more negotiations until after the referendum vote this Sunday when the people of Greece will decide if they want to accept a bailout on EU terms. Despite a widespread anti-austerity sentiment in Greece, most Greek citizens would not want to see Greece leave the eurozone, and recent polls are suggesting that the Greek people are split nearly 50/50 on whether to accept or reject the EU's current bailout proposal. As one can see, this crisis continues to drag on without a clear resolution.
This morning's strong rally in the broad stock market was likely a case of "selling on the rumor" and "buying on the news". In other words, the markets could have already factored in the fear of a Greek default with Tuesday's plunge so that when it actually happened without much hoopla (an "arrears" is less exciting than a "default"), traders decided to get back in. This "recovery" rally, however, was quickly turned back by resistance at the 17,800 level in the DOW. The index then moved down until late afternoon when it was announced that the European Central Bank would leave its current amount of Emergency Liquid Assistance (ELA) available to Greek banks at around 89 billion euros. The ECB also decided to delay making any decisions that could "tighten the screws" on Greece's banking sector. (All of this goes against standard ECB policy as ELA can only be given to banks that are seen as solvent, and Greece's banks cannot be considered solvent under present circumstances. Most analysts feel that these decisions were made because the ECB does not want to be accused of interfering with the referendum vote on Sunday.) The always short-sighted broad stock market seemed encouraged by this news (those Greek banks aren't going down just yet!), and the DOW started rallying again in its last two trading hours. It closed the day at 17,758.
As the reader can tell from this probably too long discussion, the Greek/Europe financial crisis is far from over and could go on for at least several more weeks. Despite Wall Street's optimism at the end of today's trading,
I maintained my short position in the broad stock market because technical signals and the cycle picture at the moment do not seem to support a significant bottom and reversal from Tuesday's low. That could change if the DOW breaks and closes above 17,800. The U.S. Fourth of July holiday falls on Saturday this week so the U.S. stock exchanges will be closed on Friday. Equity markets tend to rally into holidays (which could also explain some of today's investor optimism) so we will watch that 17,800 level carefully tomorrow.
I would like to make one final point to keep in mind when trading a volatile market that is being driven strongly by news events. Remember that Wall Street and the broad stock market do not like complexity, ambiguity and uncertainty and are always looking for a simple spin on issues to drive their buying or selling. While it may be beneficial for us to understand the complexity of a situation like the current Greek debt crisis, we should realize that stock markets are usually driven by emotional reactions to media sound bites and short headlines that may not be giving an accurate picture of what is really going on. For that reason we need to pay attention to the hype as well as the truth of news events to better gauge how markets might react. (Hopefully, we can distinguish between the two.)
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