Equities started the week off on the right foot Monday after Greece apparently softened its positions during bailout negotiations with the European establishment. Athens — under the threat losing liquidity support for its banking system from the European Central Bank — ceded ground on issues such as pension cuts and new austerity measures.
The measures were hailed as a step in the right direction by the head of the Eurogroup, setting the stage for a deal later this week.
This isn’t a done deal, and there are still risks, including a potential backlash from leftists in the Greek governing coalition, but markets cheered the delivery of good news from across the Atlantic.
When the closing bell rang, the Dow Jones Industrial Average, S&P 500 and Russell 2000 had each gained 0.6%, while the Nasdaq Composite was up 0.7%.
Energy stocks were the day’s leaders, rising 1% thanks to a 0.7% rise in crude oil to take the black stuff back over the $69-a-barrel threshold.
There was a lot of action on the healthcare M&A front as well, with Cigna (CI) up 4.7% after rejecting a $184-per-share offer valued at nearly $48 billion from Anthem (ANTM). Furthermore, the Wall Street Journal reported that Aetna (AET) made a bid for Humana (HUM).
On the economic front, existing home sales increased 5.1% to a 5.4 million seasonally adjusted annual rate in May, beating the consensus estimate for a 4.4% increase. This was the best showing since November 2009. First-time buyers, as a percentage of total sales, posted their highest share of purchases since late 2012.
But, back to Greece.
According to Alberto Gallo at RBS, Greece’s new proposal would extend the current bailout by three to six months with the disbursement of another of about $20.5 billion in additional rescue funds. It also includes deal relief as it asks the European bailout fund to buy nearly $31 billion worth of Greek bonds to lower refinancing costs.
In exchange, Athens is offering new budget austerity measures worth $8.5 billion or 4.2% of GDP. Pensions will be cut 6.5% (something that Greece had until now steadfastly resisted). Early retirements would be curtailed. Taxes would be raised on businesses and the well off. Military spending would be cut. And the value-added tax rate would be raised.
Any all-new bailout arrangement, according to the proposal, would need to include additional debt relief measures.
Gallo believes we’re likely to see the imposition of capital controls at Greek banks before this is all over — setting the stage for an increase in volatility and drama before a final arrangement is found. The endgame solution could include growth-linked debt — adjusting interest rates and payments to Greece’s creditors based on its economic health — but additional standoffs and posturing will be required first.
In the meantime, with Greek banks able to sustain the current pace of deposit withdrawals for about 20 days or so, Gallo believes we’ll see Cyprus-style capital controls put into place to stabilize the draw on Greece’s financial system. This would give negotiators more time to find a compromise.
While the tech-heavy Nasdaq and the small-cap stocks in the Russell 2000 are pushing to fresh highs, large-cap stocks continue to trade within a range first reached in December as investors tentatively await more clarity on Greece’s fate within the eurozone.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Two-week and four-week free trial offers have been extended to InvestorPlace readers.
