Stocks Rocked as ECB Rejects Greek Debt

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Investors got another wild ride on Wednesday as stocks mostly moved lower as crude oil suffered its worst one-day slump in two months. This was a marked reversal from the nascent rebounds of the past two days as the situation in Europe took a turn for the worse.

In the end, the Dow Jones Industrial Average gained a fraction, the S&P 500 lost 0.4%, the Nasdaq Composite lost 0.2% and the Russell 2000 lost 0.5%.

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West Texas Intermediate fell 0.1% to close at $48.45 a barrel, pulling down energy stocks that led the way higher on Tuesday. The Energy Select SPDR (NYSEARCA:XLE) lost 1.7%. Dow component Walt Disney Co (NYSE:DIS) surged 7.6% on boffo Frozen merchandise sales as apparently everyone younger than 12 really does, in the end, want to build a snowman.

But plastic princesses weren’t enough to overcome the headline that hit late in the session. The European Central Bank dropped a bomb heading into the closing bell by announcing it would no longer accept Greece’s sovereign bonds as collateral by Greek banks seeking low-cost funding.

Instead, Greek banks would need to borrow from their national central bank at a higher cost. As a political move, this signifies a hard line by the European establishment against Athens — particularly since it comes hours after Greece’s finance minister, Yanis Varoufakis, met with ECB chief Mario Draghi as part of the new government’s aggressive pan-eurozone tour to secure support for its renegotiation efforts.

It will also further destabilize Greek financial markets, which will put pressure on Athens to acquiesce. Technically, this also signifies that the ECB is moving to protect itself from a possible Greek exit and limit the ability of Athens to issue additional short-term debt — which will be needed after Feb. 28 — without the consent of the European establishment.

The justification was that the ECB could no longer “assume the successful conclusion” of Greece’s bailout review later this month. The new government has already backtracked on austerity commitments promised by previous leaders.

This represents a clear intensification of the situation in Europe and greatly reduces the odds that Greece will secure the debt relief its voters are clamoring for amid ongoing economic stagnation and a 26% unemployment rate.

It’s a showdown. And an agreement, if one is to happen, isn’t going to be found until markets suffer some fear and panic first with the resulting selloff focusing the minds of politicians.

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And that means that the machinations of the euro will continue to dictate the direction of the U.S. dollar and thus, crude oil. And crude oil’s movements have been a dominant factor for U.S. stocks via energy heavyweights like Exxon Mobil Corporation (NYSE:XOM), which surged 11.4% from its low on Friday into Tuesday’s highs.

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In response, I have been recommending clients maintain a defensive posture focusing on asset classes, such as volatility and precious metals, that are poised to do very well in this environment. This includes mining stocks like Yamana Gold Inc. (USA) (NYSE:AUY) which gained 6.1% for Edge subscribers today. And it includes Feb $11 call options on Barrick Gold (ABX) recommended to Edge Pro subscribers on Jan. 13 that are now carrying a gain of nearly 280%.

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/02/stocks-rocked-as-ecb-rejects-greek-debt/.

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