Stocks closed below recent support levels on Friday as bailout negotiations between Greece and the European establishment look set to go right down to the deadline once again.
A better-than-expected headline producer price inflation reading, along with a strong retail sales report earlier in the week and a solid May payroll report, also increases the odds of a hawkish take away from the Federal Reserve’s policy announcement, press conference and updated economic projections on Wednesday.
In the end, the Dow Jones Industrial Average lost 0.8%, the S&P 500 lost 0.7%, the Nasdaq Composite lost 0.6%, and the Russell 2000 lost 0.3%.
Technically, market breadth keeps rolling over as fewer and fewer stocks hold the major indices aloft — a sign of growing vulnerability as the Dow Jones moves back below the 18,000 level while the S&P 500 moves back below the 2,100 level.
Energy stocks were the day’s laggards, down 1.2% as a group after crude oil lost 1.3% to close at $59.96 a barrel on record U.S. production numbers. That boosted the ProShares UltraShort Crude Oil (NYSEARCA:SCO) recommended to Edge subscribers to a 3%+ gain for the month to date.
Back to Greece, the little country on the Aegean Sea that’s captivated global markets for years.
Within 48 hours, global markets went from believing a new bailout deal for Greece was imminent (on reports Germany was willing to accept a piecemeal deal) to fearing outright default (after talks in Brussels broke down on Thursday night).
Athens is running short of cash as it requests local government transfer all available cash to the central bank. While a $1.8 billion payment to the International Monetary Fund at the end of the month is the center of focus, the chatter is that the first sign of stress will be missed payments to workers and pensioners which could come at any time.
Reuters is reporting that European officials have held their first formal talks on the possibility of a Greek default. The upcoming meeting of eurogroup finance ministers in Luxembourg on June 18 is seen as the last best chance of securing an agreement to release funds to Athens in order to make the June 30 payment deadline.
Alberto Gallo at RBS believes the odds still favor a last minute compromise by Prime Minister Alexis Tsipras, who’s been watching his approval rating drop as Greeks clamor for a deal. There are wrinkles, such as whether compromise would result in the loss of support of the hard-left members of his coalition government.
Societe Generale is looking for discussions to continue to the very last minute with a deal possible at the EU Summit on June 25 and 26, so stay tuned.
The bigger news next week will be the outcome of the Fed’s two-day policy meeting on June 17. As noted by economists at IHS Global Insight, this will be the first policy meeting since 2006 in which the Federal Open Market Committee members will actively consider raising interest rates. A surprise June rate hike isn’t entirely off the table, but is seen as highly unlikely; a September liftoff is widely expected.
Michael Hanson at Bank of America Merrill Lynch told clients in a research note Friday that the updated “dot plot” of Fed interest rates expectations should still pencil in two rate hikes this year and four in 2016 — suggesting rate moves in September and again in December.
The team at Societe Generale disagrees and is looking for the dot plot to be downwardly revised — as it was in March, spurring a market rally — to show only one rate hike this year and four next year. This will be driven by a downward revision to their full-year 2015 GDP growth estimate to a range of 2% to 2.2% from 2.3% to 2.7% at the March meeting.
Still, there remains great potential for a negative market response. The Fed’s dot plot reflects a much more aggressive path of interest rates than futures traders are pricing in.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.
