Stocks initially plunged in trading Tuesday as a meeting of Eurogroup finance ministers broke up with no new deal for Greece, taking the S&P 500 down below its 200-day moving average for the first time since October. That threatened a level of support that has held stocks aloft, aside from last year’s Ebola-driven scare, since late 2012.
No wonder President Obama stepped into the breach, with calls to Greek Prime Minister Alexis Tsipras and German Chancellor Angela Merkel urging both sides to come to a “durable” agreement.
This — along with reports a short-term deal is in the works to help Greece make a July 20 debt payment to the European Central Bank, unlocking financing to reopen its financial institutions — lifted stocks into the green by the closing bell.
The Dow Jones Industrial Average gained 0.5%, the S&P 500 gained 0.6% and both the Nasdaq Composite and Russell 2000 gained 0.1%.
Along with the Greece dramatics, China remains in the headlines as its markets continue to plummet despite aggressive stimulus measures to arrest the decline. The Shanghai Composite lost another 1.3% for a total decline of 28.3% from its June high.
Commodities also have been hit hard, from crude oil to copper and other industrial metals on contagion concerns. Many of these metals have been used as collateral in under-the-table financing deals in China. And the drop in Chinese equities is raising demand-side concerns about the health of the economy there.
U.S.-listed Chinese stocks were hit hard, with Alibaba Group Holding L (NYSE:BABA) down more than 5% in trading before closing the loss to finish down 0.8%.
Treasury bonds punched out of their two-month channel with the iShares Barclays 20+ Year Treasury Bond Fund (NYSEARCA:TLT) rising 0.9% on safe haven inflows.
At the sector level, the tone was also defensive with utilities and consumer staples leading the way with gains of 2.5% and 2%, respectively. Recent burger joint IPO Shake Shack Inc (NYSE:SHAK) dropped 7.2% after being downgraded by Morgan Stanley on valuation concerns and worries brand-related optimism isn’t supported by the financials. Along with the drop in BABA, the SHAK meltdown reflects the reality of the fading of post-IPO buzz.
Back to Greece.
Despite the market’s readiness to embrace any constructive headline, the Greek debt problem is intractable with no easy solutions.
The Greeks want debt relief and voted against austerity. The eurozone wants reforms and austerity and are worried debt relief will unleash moral hazard. Time is running out to find a compromise: The European Central Bank’s increase of Greece’s collateral haircuts on Monday effectively tightened the noose.
James Mackintosh at Financial Times summarizes: “If the Greeks are allowed to walk away from that debt, Spaniards, Portuguese, Italians and Irish will quite reasonably say they should be let off, too.” Thus, Germany and other core nations can’t indulge Greece’s demands for fear of fueling similar anti-austerity political movements such as Podemos in Spain and the Five Star Movement in Italy.
If a stalemate persists, the next big deadline will be a $3.8 billion payment to the ECB on July 20. A default on this by Greece would likely force the central bank to pull back its liquidity support, force Greece to issue California-style IOUs as reported by the Telegraph, and precipitate the move toward the restoration of the drachma.
Unless Europe countenances to Greek debt relief soon and Greek leaders embrace the austerity measures their people just voted against, the situation will quickly deteriorate pulling U.S. stocks back down.
The latest from a French official is that the short-term deal in the works would require Athens to pass budget measures in exchange for the prospect of debt reduction as part of a long-term deal. The short-term deal would fund Greece through the end of the month.
More ultimatums are being made. Merkel is demanding a Greek austerity proposal by Thursday. And Italian Prime Minister Renzi has said the final and definitive meeting of all 28 European Union leaders on the Greek bailout will take place on Sunday.
Technically, a close below the S&P 500’s 200-day moving average would be a body blow to the bulls that have had things their way since 2012. Wednesday’s release of the latest Federal Reserve meeting minutes (sure to include references to approaching rate hike timing), and the start of the Q2 earnings season when Alcoa (NYSE:AA) releases after the bell (expect disappointing results on lower energy prices and a strong dollar), could complicate any effort to prevent this from happening.
As a result, I continue to focus on defensive positions such as the July $17 Short-Term S&P 500 VIX (NYSEARCA:VXX) calls I recommended to Edge Pro subscribers that were up nearly 413% in mid-day trading on Tuesday.