Equities moved lower on Friday, partially reversing some of Thursday’s gains, as traders prepared for another weekend of headlines out of Europe as Greek bailout negotiations go down to the wire.
In the end, the Dow Jones Industrial Average lost 0.6%, the S&P 500 lost 0.5%, the Nasdaq Composite lost 0.3% and the Russell 2000 gained 0.1%.
Crude oil lost 1.5% to close at $59.56, dragging down energy stocks by 0.9% as a group. The ProShares UltraShort Crude Oil (NYSEARCA:SCO) recommended to Edge subscribers gained 3.3% bringing its month-to-date gain to 5.4%.
Technically, breadth remains weak as the Dow Jones hovers just above the 18,000 level. For now, a holding pattern remains in play. But that could soon change — now that the Federal Reserve is unlikely to move on interest rates before September, everyone’s attention once again focuses on the deteriorating situation in Greece.
Officials at the European Central Bank allegedly admitted that Greek banks might not be able to open on Monday as deposit outflows accelerate. Negotiations have broken down and positions have hardened as Athens seeks a way to repay $1.8 billion to the International Monetary Fund by the end of the month without committing to more draconian austerity measures.
Desperation is setting in.
The Athens Exchange lost 11.3% last week for its fourth consecutive weekly loss. Greece’s economy is in shambles: The unemployment rate is 26%, the youth unemployment rate is nearly 50%, deflation has been in play since 2013 (increasing real debt costs) and the country has fallen back into recession as GDP has contracted for two consecutive quarters.
Eurozone leaders have scheduled an emergency meeting for Monday. And the European Central Bank will consider more assistance liquidity for Greek banks on Monday as well.
Athens must make a decision soon as its cash reserves dwindle. At this point, a default to the IMF looks unavoidable.
Any new deal — which seems far off anyway — would need to pass national parliaments, including Germany’s, before being implemented. Moreover, the IMF has said it would not offer a grace period or allow a delay in payment. But layers of bureaucracy mean it could take a few months before the missed payment becomes a legal default. Credit rating agencies have also said they would not consider a missed IMF payment as a default on private-held bonds.
Financial markets could view non-payment differently, however.
The next hard deadline becomes the July 20 payment to the ECB. If missed, it would be politically difficult for the central bank to continue supporting Greece’s financial institutions. The point is that while we’ve entered what looks to be the final act of this fiasco, it could be a long ending to a story that just doesn’t want to die — rattling investor sentiment and unnerving markets in the days to come.
Next week, we’ll get updates on existing home sales, durable goods and the government’s third estimate of Q1 GDP growth.
And as a reminder, the start of the Q2 earnings season is two-and-a-half weeks away.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to Investorplace readers. Clink the links above to sign up.
