Is A 'Grexit' Back On The Table?
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One of the most interesting and/or maddening things about the stock market is that the focus can turn on a dime. One day traders are focused on the Fed, the economy, and/or earnings, and the next, well, it can be just about anything.
Such is the certainly case at the present time. Up until Friday, the stock market had been driven by the price of oil on a daily basis. Wall Street's computers had created correlation trades that tied buy and sell programs in the stock market to the movement in oil futures.
The thinking was fairly straightforward as nobody could be completely sure about the extent of the fallout from what can only be described as a crash in crude prices.
On a micro basis, there was concern about the number of marginal companies that would be forced to fold should oil keep falling, the defaults in junk bonds, and the ensuing impact on the banks. And from a macro point of view, the worry was that the nation's job growth would suffer and the "escape velocity" that the Fed has spent five years and trillions of dollars establishing, could falter.
While this may not make a lot of sense to individual investors, the idea is that if crude were to continue to dive, the economic fallout would likely worsen. And then conversely, if the crash in crude prices subsides, much of the worry as to what might happen next could be removed. Enter the correlation trade, where stocks and oil are joined at the hip.
The key here is that Wall Street does not like surprises. History proves that the market can "deal" with just about anything given enough time and information. It is the surprise factor that oftentimes causes traders to sell first and ask question later.
So, with the oil crash now more than seven months old and the stock market indices only a couple percent off their all-time highs, one could argue that the worry about oil might be waning. As long as oil didn't resume the waterfall decline, the thinking is that traders might be able to move on - meaning that the oil/stock correlation trade could be removed.
The End Of The Correlation Trade?
This appeared to have been the case on Friday. In short, oil and stocks wound up going in opposite directions. While oil prices actually rose a couple percent, stocks experienced yet another bout of intraday volatility, giving up early gains and finishing in the red.
In the early going on Friday, things were looking up. Oil was up and the Nonfarm Payrolls report showed that job growth (along with a bunch of other statistics) looked pretty good. As such, stocks were moving on up after the opening bell and it looked like the recent trading range might finally be resolved to the upside.
However, just about the time you thought it was okay to take your eye off of the intraday madness in the market for a while, the headlines out of Greece started to hit the tape.
The New Focus Is...
There was word that Greece's debt rating had been cut by Standard & Poors, which to most thinking investors wouldn't seem to be much of a shock. But to headline-reading algos, this was just another opportunity to hit the panic button.
Next, Eurogroup Chairman Dijsselbloem made the pronouncement that Greece would need to get moving in order to apply for an extension to their bailout funding, which, by the way, has some sort of deadline of February 16 tied to it.
Finally, there was word that Greece's new Prime Minister, Alexis Tsipras would provide a detailed account of his plans to solve the debt situation on Sunday.
And just like that, the focus changed. Gone was the worry about oil. No, traders and their computers were back to worrying about Greece, a "Grexit," and what could happen to the Eurozone. Joy.
The Game Begins - Again
In his speech to Parliament on Sunday, Tsipras said that his country would not seek an extension to the current bailout. Instead, the Greek PM said his government would negotiate new deals with its partners.
While that may not sound too bad, the translation is that despite the stern warnings from the Eurozone and Germany, Tsipras says that he plans to renegotiate the terms of Greece's debt and bailout deal. In essence, this means is that he wants bond holders to write-off more of the debt.
The problem is that Eurozone leadership has already made it clear that there is no way this is going to happen. So, we're back to worrying about Greece defaulting on their debts and leaving the Eurozone, which, of course, paves the way for the rest of the PIIGS to follow suit.
Thumbing His Nose At The EU
Tsipras went on to say Sunday that he will be reversing many of the structural reforms that were part of the bailout deal. Tsipras said he would cancel the property tax that was put in place, raise the personal tax threshold, and restore minimum wage to pre-crisis levels.
Also on Sunday, Greek Finance Minister Varoufakis said that if Greece is forced out of the Eurozone other countries will inevitably follow suit and that the currency bloc would collapse. Varoufakis said that Greece's debt problems must be solved as part of a rejection of austerity policies for the Eurozone as a whole.
And in a sound bite that would make Hollywood agents proud, Varoufakis said his government would propose a new deal for Europe like the one enacted in the US in the 1930, which would involve the European Investment Bank investing ten times as much as it has so far. Good one.
Oh, and on another humorous note, the Greek government said over the weekend that it has no short-term cash problems. (Never mind that Greece's Economy Minister had warned last week that the country is on course to run out of money in just weeks if it doesn't gain access to additional funds.)
So there you have it. It would appear that oil is out and Greece is back in as a focal point. Or rather, oil is not a concern as long as it isn't crashing. But the bottom line is that traders we are back to watching the headlines out of Europe - yes, again.
Turning To This Morning...
Greece continues to be the word in the early going. Alexis Tsipras' anti-austerity government stirred the pot over the weekend, basically saying it is going to ignore the warnings from the Eurozone and renegotiate its deal. This has put the potential for a "Grexit" to occur and brought new fears of what could happen next. Not surprisingly, European bourses are down hard across the board. In what may today be viewed as yesterday's news, oil is on the rise again today after an OPEC report.
Thought For The Day:
If your ship doesn't come in, swim out to it. - Jonathan Winters
Current Market Drivers
Listed below are what these authors believe to be the driving forces of the current market (Listed in order of importance).
1. The State of the Greece Situation
2. The State of the Oil Crash
3. The State of the U.S. Economy
4. The State of Fed/ECB Policy
Image credit: Ggia, Wikimedia
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