Stocks Challenge Dow 18K on Greek “Pre-Deal”

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Stocks soared in ebullient fashion on Monday as an 11th hour deal between Greece and its European creditors was finally happened out after three weeks of brinksmanship. The deal amounts to a full surrender by Athens, just one week after its people voted “Oxi” against more austerity in a surprise referendum.

In exchange for merely the consideration of a new bailout package worth about $100 billion (this is the third deal since the Greek debt crisis started in late 2009, for those keeping track at home), Greece must submit and pass a long list of measures by Wednesday — including, embarrassingly, $55 billion worth of state assets into a privatization fund.

In other words, Greece is getting a visit from the repo man. Which explains why Greek stocks plunged in response.

But hope springs eternal on Wall Street. The fact that any agreement at all was hammered out was enough to juice markets elsewhere. In the end, the Dow Jones Industrial Average gained 1.2%, the S&P 500 gained 1.1%, the Nasdaq Composite gained 1.5%, and the Russell 2000 gained 1.1%.

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Crude oil fell 1.1% to $52.18 a barrel as an Iranian nuclear deal edges closer to completion, threatening to unleash more oil exports into an oversupplied market. That pushed the ProShares UltraShort Crude Oil (USO) recommended to Edge subscribers to a gain of 25% for the month to date.

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Technology led the way higher, rising 1.6% at the sector level thanks to a 3.1% rise in Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL), a 2.4% rise in Facebook Inc (NASDAQ:FB), and a 2.1% rise in Microsoft Corporation (MSFT).

China also lifted spirits as Beijing’s threat to jail short sellers lifted shares there continued to lift shares. Better-than-expected June trade data helped as well, and the Shanghai Composite gained 2.4%.

The Q2 earnings season will heat up in big way starting Tuesday morning when Johnson & Johnson (NYSE:JNJ), JPMorgan Chase & Co. (NYSE:JPM), and Wells Fargo & Co (NYSE:WFC) report results. As a reminder, analysts expect the second-quarter earnings season to post the deepest outright decline in earnings growth since 2009.

Back to Greece. Despite investor enthusiasm, Wall Street analysts are pooh-poohing the deal. In short, the Greek debt drama appears far from over.

The crux of the problem, as outlined in a the strategically timed release of a Greek debt sustainability analysis in early July by the International Monetary Fund, is that Greece simply cannot work its way out of indebtedness — let alone an additional $100 billion should Sunday night’s deal go through. It needs debt relief via a lengthening of bond maturities at a bare minimum.

On this front, eurozone hardliners carried the day. The Euro Summit statement “stresses that nominal haircuts on the (Greek) debt cannot be undertaken” and that past bailout programs “adopted a remarkable set of measure supporting Greece’s debt sustainability.”

In other words, they feel it’s Greece’s responsibility to embrace further budget austerity and economic reforms in the context of an economy that’s in the maw of a six-year-old depression amid a 50% youth unemployment rate. Greek banks, which have been closed for two weeks, remain shuttered with Wednesday seen as the soonest they will get increased liquidity support from the European Central Bank to reopen.

Capital controls, including limits on deposit transfers, are expected to remain in place. Greek Prime Minister Alexis Tsipras could very well face popular protests and political infighting over the next 48 hours.

Goldman Sachs, while noting the pre-deal announcement is a positive surprise in the near term, they have two main concerns. The first is residual implementation risks as politicians on both sides get their say. The second is that this merely amounts to more of the same — fiscal austerity and debt deflation — and will continue to reveal the structural flaws of the eurozone.

Deutsche Bank believes Greece is headed for a new election in September in which the political battle will not be over who is for or against austerity measures; but instead, who is for or against a return to the drachma and an exit from the eurozone.

Bank of America Merrill Lynch warns that after the over-the-weekend discussion of a “Grexit” by the Germans, an exit from the euro is now (in their minds) officially something that can be used as a threat against countries that don’t toe the line on fiscal discipline.

Stay tuned, because the circus act isn’t over yet.

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Free two- and four-week trial offers has been extended to InvestorPlace readers.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/07/stocks-challenge-dow-18k-on-greek-pre-deal/.

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