From Peter Tchir of TF Market Advisors [8]
Mere Mortals In A Central Banker World
Plus 5% or minus 5%? That is the question and frankly it hinges far more on central bank and political policy than on any economic data, earnings, new products, etc.
A policy response in Europe that keeps Greece in the Euro for now and takes pressure off of the Spanish and Italian markets and stocks in Europe can quickly shoot up 5% or more. We might need a little help from the Fed to get a 5% move from our relatively lofty valuations, but that is possible as enough data has come out to justify an aggressive move by a very dovish Fed.
Failure to contain the growing solvency and devaluation risks soon will likely result in a quick and brutal continued sell-off as fears of contagion drag down the more resilient markets - Germany and the U.S. in particular. The crisis in Greece and growing problems in Spain and Italy are at a tipping point and if not addressed will drag down other markets. Even an aggressive Fed acting alone can't do much to mitigate the risk to the U.S. markets, especially in a scenario with a rising dollar.
So it feels like TARP week all over again. We may not get the 8% swings we got then, but the volatility is picking up and it is difficult to do much in the short term when the real driver, like it or not, will be what decision a bunch of politicians and central bankers, each with their own agenda, goals, and baggage come up with.
I believe Europe will see the danger of the escalating problems and come up with enough short term liquidity and longer term ideas like project bonds and ESM with a bank license to give the can one more good kick. Merkel and even the Bundesbank have grown quiet - to me a sign that they are softening their stance. I could be wrong, but that is how I'm leaning, but with all the volatility out there and risk of bad decisions, it is key to remain small and nimble.