On Sunday night, markets looked like they would be roiled by the election of the anti-bailout/anti-austerity Syriza party in Greece — which threatens to undermine the stability and adherence to the 2012 Greek bailout terms that Europe has enjoyed. Futures were also weighed down by the increased intensity of fighting in Eastern Ukraine.
But as the cash trading session opened, the buyers drove the major average higher for incremental gains. In the end, the Dow Jones Industrial Average gained a fraction, the S&P 500 gained 0.3%, the Nasdaq gained 0.3%, and the Russell 2000 gained 1%.
Crude oil was caught out again, dropping 1.1% to close at a fresh low of $45.11 a barrel. But energy stocks, in a surge of short covering ahead of earnings announcements from the sector later this week, diverged to climb 1.4%.
During the energy meltdown of the last few months, energy stocks have separated from crude oil a number of times; all of which were resolved by renewed selling pressure on the likes of Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM).
CVX reports on Friday while XOM reports next Monday.
Overall, earnings have been a bit of a disappointment so far: With just over 16% of S&P 500 companies on the books, the overall earnings growth rate stands at 0.2% vs. 1.7% at the end of the quarter according to FactSet data.
This week will be heavy with reporting as about a third of the S&P 500 announces. Watch for the impact of lower energy prices as well as the stronger dollar, which reduces repatriated profits from overseas (made worse by slowdowns in Europe and Asia). After the close, both Microsoft Corporation (NASDAQ:MSFT) and United Technologies Corporation (NYSE:UTX) missed on top- and bottom-line results for Q4, sending shares sharply lower in after-hours trading.
Back to Europe. We’ve seen a massive sea change in the politics of Greece as that country — with a 26% unemployment rate — struggles with Europe’s ultimately self-defeating austerity regimen that has tipped the country into a debt-deflation nightmare.
Three years ago, the center-left Pasok party had 160 seats in parliament, and was the party that was in control when the eurozone crisis first broke out in 2010. Syriza had 13. Now, Pasok is set for between 12 to 15 seats while Syriza is on track for upwards of 158. In fact, the party is on the verge of an outright majority; which wouldn’t require smaller parties to form a coalition government.
Next steps are for Syriza to elect a new president and then start the task of negotiating with Europe to modify the terms of its bailout and secure debt relief. Long story short: After much posturing, Germany and the other creditor nations will likely accommodate more lenient terms.
But before we get there, there will be much hand-wringing over the prospect of a Greek exit from the eurozone — and whether or not this increases the odds of too-big-to-fail countries like Italy or Spain breaking away.
Syriza campaigned on, and has a mandate to pursue, this initiative. Turning the knife, they are calling for the same level of debt restructuring that Germany was given in 1953 despite the still fresh memories of Nazi horrors. This is democracy in action against the austere self-interests of Berlin.
So ultimately Sunday’s election could be a step toward finally ending the eurozone crisis for good; but it’s likely to frighten a lot of investors about a possible breakup of the world’s largest economic bloc first — which, admittedly, remains a possibility.
And this comes amid a marked increase in commodity and currency market volatility, and a massive compression in long-term bond yields, that suggests that pretty much all markets aside from stocks are already feeling pretty nervous.
Core eurozone bond yields are in outright negative territory already. The U.S. 30-year yield and the Japanese 10-year yield are at record lows. There have been a number of surprise central bank actions, from the ending of the Swiss rate peg to rate cuts in Denmark, India, and Canada and rate hikes in Russia and Brazil.
Any near-term selloff in stocks will surely result in the Federal Reserve pushing back the timing of its first rate hike to the back half of 2015 or later. This Wednesday’s policy announcement is probably too soon for such a shift — although it’s being felt out in leaks to the media — which means the bulls would have to wait until March 18 for this catalyst.
Between then and now, there will be trouble.
I response, I have recommended by Edge subscribers reestablish long positions in volatility via the leveraged VelocityShares Daily 2x VIX Short-Term ETN (NASDAQ:TVIX). We recently closed a trade in TVIX, holding between Dec. 1 and Jan. 20, for a 46% gain. I’m also focusing on precious metals, with the Market Vectors Junior Gold Miners (NYSEARCA:GDXJ) up 9% for clients since Jan. 6.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.
