It doesn’t really matter where you look – other than the Athens Stock Exchange index which was off by 1.08% - stock markets were on fire on Tuesday, in a reversal to beat all Tuesday reversals.
The DAX was up by 2.18%, the CAC-40 up by 2.46%, the MIB up by 3.43% and the Dow, the S&P500 and the Nasdaq rallied by 1.22%, 1.37% and 2.00%, respectively. Whether the key driver to this global grab-a-thon was the mind-boggling US new home sales data for April or the agreement on the release of €10.3bn to Greece is moot.
The problem has never been that the EU is unwilling to stuff whatever cash is necessary into the Athens Treasury, it was how to placate the IMF, which showed little appetite to take ever more Greek government promises at face value. It wanted to see some form of debt relief that would give the Hellenes a fighting chance of digging themselves out of their hole. Although essentially of their own making, it would never have been as deep as it is without the excavation machinery so generously provided by the rest of the union.
Deadlock
Enter, stage left, the man of the moment, Mr Inflation. By agreeing that the Syriza administration has, nominally at least, met all the conditions it had been asked to it was offered the keys to the escape hatch with the opportunity to swap existing debt for debt with significantly lower interest rates and then - and herein lies the sugar coating - the prospect of deferring capital repayments “should that prove necessary”.
I understand that the horizon for deferred payments is as far out as 44 years. Assuming for arguments’ sake an average annual inflation rate of 2% and it becomes immediately clear that although there is no nominal debt relief, Mr Inflation will take care of debt reduction.
Thus, everyone is a winner. The IMF can see the time decay on the debt pile at the same time as the Germans can return to Berlin satisfied that there is no mention of debt write-down. As far as the agreements on the government’s obligation to deliver primary surpluses go, convince yourself of whatever you like. Just over two weeks before the beginning of the European football championships, Brussels has taken the first prize in kicking the can down the road.
Breakthrough?
Eurogroup head Jeroen Dijsselbloem, whom I otherwise hold in high regard, spoke of a great “breakthrough”. I simply have my doubts about what has been broken through and whether the whooping and hollering and dancing in the aisles might not be more about playing to the gallery than being convinced that the Greece debt issue has been resolved or finally put to bed.
We all know the answer to whether the issue has been resolved is “not in the slightest” but the markets will surely behave as though it has. It might all be wrong but if there is money to be made riding the wave, one would be very silly and possibly in breach of one’s fiduciary responsibility if one were not to.
Meanwhile, in the US we got the April new home sales release from the Census Bureau. Consensus had been for an annualised number of 523,000 but the figure reported was a staggering 619,000, which reflected a month-on-month increase not of 2.4% as anticipated but of 16.6%. When facing a data-dependent FOMC, the market should have tanked but it didn’t. In fact the Dow put on 213 points and the S&P 28 points.
Check and query! Are we now to believe that positive data drives markets higher, irrespective of what it motivates the Fed to do in terms of interest rates? Or is the move in oil to be credited with driving prices up again? WTI did, after all, rise pretty persistently after the release of the housing data until it closed US$49.26 per barrel, its highest close since October. It hasn’t in fact been above US$50 since mid-August and that hurdle now looks quite easy to clear.
It is debatable whether yesterday’s jump-start will carry through but I’d suggest that for the rest of the week the tone should be positive, technically at least. Even the DJ Utilities Index, which is supposed to be totally interest rate-sensitive threw off doubts and rallied by over 1% and the VIX volatility index fell by nearly 10% to close at 14.42. I’m not entirely certain what markets are trying to tell me but whatever it is, I’m darned sure I don’t understand it.
Finally, Jim Bullard of the St Louis Fed was interviewed on CNBC. He made all the necessary noises about data dependency and so on but the key comment was that there was no need to link a rate move to an FOMC meeting with a scheduled press conference (July’s meeting has no press conference). He might have been simply stating a fact but he might also have been flying a kite over the possibility of the move being effected in July and not in June. I have always favoured July over June and have never understood why commentators have been so obsessed with June 15. We’ve already established that going just one week before the Brexit referendum looks a bit selfish.