Kristian Rouz – The outgoing week has seen major gains in stocks markets worldwide, with some indices hitting their historic record highs, driven primarily by the recent political developments n Europe, largely seen as positive from an economic perspective. These include, of course, the yet another half-hearted international attempt at negotiating a fragile peace in the Ukrainian revolutionary war and the long-anticipated solution to the Greek debt crisis, both met with cheer in the global bourses.
During Thursday’s and Friday’s trade, as Greek concerns mounted and then calmed, the S&P 500 Index extended its two-week rally beyond 5%, finally breaking through the psychological threshold of 2,100 points after several failed attempts in the previous days.
Wall Street has been optimistic solely due to political factors, and the markets are now anticipating economic indicators to arrive the upcoming week. Several reports, including housing market data, consumer confidence, a preliminary Q4 GDP assessment and consumer prices data are likely to show robust growth in the US, potentially pushing the Federal Reserve to monetary tightening through hiking interest rates. This would drag stocks into the red zone, as even the expectations of a more expensive credit usually take a toll on the financial sector.
"I do believe Janet Yellen (Federal Reserve chair) at her word. They are going to be data-dependent. While we have had some softening, the general trend of the recovery is still intact," Jeffrey Saut of the St.Petersburg, FL-based Raymond James Financial told Reuters.
During this past week, the Dow Jones Index added 0.7%, Nasdaq gained 1.3%. In January, wholesale prices fell in the US, resulting in a lower inflation, while home sales retreated slightly and manufacturing output gains fell short of forecast as a result of harsh winter conditions.
With US stocks heavily overvalued, market volatility fell last week by 2.7% to 14.3%, as estimated by Chicago Board Options Exchange, its two-months low. Volatility has been decreasing for three consecutive weeks, meaning early next week is high time it started increasing, which, combined with a retreat in stocks, might plunge markets into a large-scale turbulence.
While it is the right moment to sell equities in the US, in Europe volatility is on the rise. With the Ukrainian deal already broken and the Greek negotiations most likely to fail early next week, investors have more to be worried about. In the end, regardless of the outcome of the Greek talks, the indebted nation will still need even more money.
There are three major scenarios, all related to the development in the Greek situation (as the war in Ukraine is doomed to go on indefinitely). First, Greece could fully implement the austerity and reform package of the Troika, effectively adjusting their economy in accordance with the EU-IMF-ECB designs. This will trigger an even greater rally in stocks, meaning now’s the time to buy. However, given the behavior of the leftie cabinet in Athens, such a scenario is not likely to happen.
Second, the so-called Grexit, with Greece leaving the Eurozone, to pursue their own monetary policies. The most likely scenario, with the euro appreciating, Eurozone’s growth accelerating and stocks mostly gaining, however, some uncertainty over the conditions of the Greek divorce might rock the markets with some turbulence.
Third, and the least likely scenario, Germany exiting in Eurozone, reintroducing the strong Deutschmark, backed by the nation’s robust economic performance and significant trade surplus. The euro will plunge in a dramatic selloff and most bourses, except for in Frankfurt and London, will crash.
However, given that Germany has been the greatest contributor to the creation and sustaining the Eurozone, this scenario will hardly come into reality.
Nevertheless, the markets’ latest wave of optimism has proven to be premature. A sick practice of buying stocks on the news of international politics has never done the stocks traders any good, and the next week is most likely to prove that stock markets should only react to economic indicators, not treaties with well-known impostors of international politics.
