U.S. stocks moved sharply higher on Friday — ahead of another critical weekend for Greece as its membership within the eurozone hangs in the balance — thanks to increasingly aggressive measures by Chinese authorities to stem the selling that had, at its worst, pushed the Shanghai Composite down 35% from its June high.
Measures included halting a large share of listed stocks, banning insider sales and threatening to jail short sellers.
Hopes were also lifted by indications that Greek Prime Minister Alexis Tsipras is willing to ignore last weekend’s anti-austerity referendum result by promising more pension cuts and budget reforms in a last-ditch meeting of European officials this weekend to secure his country’s place within the eurozone.
In the end, the Dow Jones Industrial Average gained 1.2%, the S&P 500 gained 1.2%, the Nasdaq Composite gained 1.5% and the Russell 2000 gained 1.5%.
Technology stocks led the way with a 1.6% gain. Energy was the laggard, down 0.5%, as crude oil fell 0.2% to close at $52.69 a barrel. That lifted the ProShares UltraShort Crude Oil (NYSEARCA:SCO) recommended to Edge subscribers to a month-to-date gain of 23%.
Technically, stocks remain vulnerable here as breadth remains weak and the major averages cling to their 200-day moving averages. We haven’t suffered a major correction since 2012, yes. However, with the situation in Greece and China still in flux amid the threat of higher rates this year, and with the Q2 earnings season ramping up next week (with earnings expected to fall 4.5%, according to FactSet, the first decline since 2012), one gets the feeling we could be looking at the start of one right now.
Federal Reserve Chairman Janet Yellen was in the news as well as she gave a speech on the economy and monetary policy in Cleveland. She reiterated that rate liftoff is appropriate sometime later this year, that the exact timing of liftoff shouldn’t be overemphasized and that everything was dependent on the flow of economic data.
The speech was considered a little hawkish since Yellen didn’t mention global turbulence out of China and Greece — suggesting the Fed is trying to ignore what’s happening overseas. There will be more from Yellen next week as she presents her regular semi-annual testimony to Congress.
Speaking of Greece …
Markets have been enthralled by the ongoing standoff between Greece and its creditors over the last few weeks. On Friday, it appears that we’re in for another nail biter.
Two weeks ago, it was the fate of what was then billed as last-ditch bailout negotiations that resulted in Tsipras calling for a referendum vote on proposed austerity measures and the European Central Bank freezing its support of Greece’s financial system, closing banks and resulting in the imposition of capital controls and deposit withdrawal limits. Last weekend, it was whether the Greeks would vote against the bailout proposal, increasing the risk of a Grexit and restoration of the drachma.
Now, despite the “No” vote, Athens has submitted a proposal to its creditors that looks remarkably similar to the plan the Greeks rejected. This concession is a bid to reopen talks ahead of what’s been billed as a “final” deadline Sunday for Greece to secure additional rescue fund in order to reopen its banks next week and meet a do-or-die debt repayment to the European Central Bank on July 20.
First up, the Greek parliament will need to vote in approval of the latest proposal which cannot be assured as members of Tsipras’ own party accuse him of ignoring the will of the voters. The package Greece submitted, if accepted, would amount to a third bailout program asking for upwards of $66 billion in rescue funding in exchange for $16 billion in new austerity measures.
With Greece retreating on austerity, the crux of the standoff now focuses on whether Germany and other hardliner creditors will accept a Greek debt write off as a way to get the country back on a unsustainable fiscal footing.
Any deal would need to pass the individual national parliaments of eurozone countries, drawing the crisis that started in late 2009 out even further. With Greece’s economy stalling as banks remain closed, supply chains grind to a halt, and factories close, it simply can’t wait much longer. Nor can the possibility of a political crisis and protests in Athens be dismissed either as Tsipras ignores the result of the referendum he called for.
Without a deal this weekend, Alberto Gallo at RBS believes Athens will be forced to turn to depositor “bail-ins” and currency IOUs to merely survive and keep the hope of staying in the euro alive.
The cost of failure? A Grexit, in his estimation, would cost Greece’s public and private bondholders $253 billion while slashing 4.4% off of Greece’s economy next year.
We’ll know more Sunday night as the futures market reopens.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Two- and four-week free trial offers have been extended to InvestorPlace readers.
