July 6, 2015
Weekly Market Outlook
By Keith Schneider
The double reverse surprise occurred this week when the equities market seemed stunned after Greece forgot to remit an interest payment to the IMF. US indexes sold off 2%, the largest one day move in several years. It also ended the quarter net down, the first time in over 2 years as well.
The players anticipating a default who felt it was already baked into the current equity prices got hit, at least for the moment. The Greek referendum this weekend will determine whether or not it will accept austerity measures demanded by EU and the IMF. Most Greeks want to stay in the EU but not happy about crushing cutbacks that have already crippled the economy. They want in, but not crushing austerity. A yes vote however appears to support backing down to the creditors and staying in the Euro, but even that is not a given.
Merkel and Germany seem to have had enough of Greece and look braced for a Grexit. It appears that Merkel and Germany have only partially learned from recent history. German defaults after WWI led to Fascism, Hitler and WWII. Not wanting a repeat, the Allies came up with the Marshall Plan, extended massive financing and debt forgiveness to Germany which is why it has emerged as a financial powerhouse it now is. So why isn’t this now true for Greece?
However, in all fairness to its creditors, Greece has the world’s worst record regarding repaying debt payments by missing them about half the time since 1800. Russia comes in a close second. Greece thru gross mismanagement, has never emerged as a truly industrialized nation after WWII although they did have a brief growth spurt in the early part on the new millennium fueled by easy money. However, it is estimated that 90 % of tax revenues go uncollected in Greece, as compared to just 3% in Germany. How they were able to borrow 300 billion euros is yet another version of the subprime crises in the US. The borrower and lender each have a share of responsibility.
Greece certainly needs a reprieve from a crushing debt load, and although it’s not powerful enough to wreak havoc on the world like Germany which did twice in the last century, the situation must be dealt with. The possibility of fascism rearing its head in Greece and then rippling thru the rest of the weaker EU countries is a real threat to the global economy and world peace. Greece leaving the Euro and then slipping into the sphere of Putin’s Russia is even more likely and troublesome.
Meanwhile, between the Fed threatening to raise rates, the Greek vote pending, ISIS rising, and the Chinese stock market descending (but still deep in bubble territory), and with Putin cutting off gas supplies to the Ukraine, the global markets are on edge.
The volatility on an absolute basis shows relative calm but has perked up and breached the 50 day moving average for the first time since February. Global stock markets are stuck in neutral for the most part. With few exceptions, trend readings are the most neutral in years across most asset classes.
Mostly off the radar there was a huge standout in two ETF’s this week worth noting. The outcome to the Greek vote on Sunday is anyone’s guess and markets should react with some vengeance. Even after the votes are tallied it is still unclear just how things will play out.
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