Some interesting observations from Bloomberg's Richard Breslow, seeking to explain why stocks are soaring (although the optimism appears to be waning in the last few minutes as reality intervenes) on absolutely nothing.
The market has shaken off Friday’s Greece jitters and has convinced itself a deal remains the base case, or indeed the only case.
Even with capital controls as an interim step, the argument goes, such a harsh reality will bring compromise. This argument is proffered by those who think Greece is being “difficult.”
Another argument says the EU and IMF know that a Greece default is a bad thing, perhaps a really bad thing (despite all the protesting to the contrary) and will see their way to a deal. If only Greece would give them a face-saving way to pull it off.
What an unexpected irony it would be if the IMF had to be the fall guy. It is quite clear that the rest of the world has no appetite to experiment whether there will be contagion and have made that clear to the EU.
So today equities are flying, risk is bid and peripheral spreads are tightening at speed. Read another way, excess cash suddenly feels, well, excess, and long-standing short EUR positions are being wiped out ad seriatum. So what might happen when the dust settles?
Bunds don’t look very good. No matter where you draw the retracements from, 10-year yields look technically set to test 0.88% and through there have another go at 1%. Not really what the ECB intended with QE. Let’s not forget that the Bundesbank has not been exactly bund-friendly, as it has been cutting the duration of its QE purchases.
The U.S. 10-year yield is also remembering this morning that whether it is September or December, official rates are set to go higher. It was only June 10 when 10-year rates were pushing up against 2.50%. What if those numbers we are data dependent on start to pick up, as forecast?
In the last period, the back-up in haven market yields led to the EUR rallying against the USD on yield spread narrowing. That argument sounded good, especially with an enormous, and stale, CFTC-reported EUR/USD short position. That position was cut by a dramatic one-third in the most-recent report. The Fed is tightening. The ECB isn’t. Does the ECB want a EUR over 1.1500? Unlikely. Technicians are calling for 1.1800. The protests from the Chambers of Commerce in Europe will be loud and clear.
If the USD starts to leak, commodities are likely to be bid; oil, gold, iron. Maybe good for the ruble and shale producers. Less so for the rest of the world. I have a hard time seeing it.
However you slice it, deal or no deal on Greece, markets are not at equilibrium and are set to move.
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Then again, this is all merely goalseeking a narrative to a market snapshot in time, driven as much by stop-hunting algos as central banks using the CME's Central Bank Incentive Program [7].
And now sentiment is suddenly shifting to the negative following headlines such as this one:
- ECB NOWOTNY: TO REVISIT ELA DECISION IN LIGHT OF TODAY'S TALKS
Which is basically the ECB's own ultimatum that Greece needs a deal done today, or at least to concede to all Troika demands, or else the ECB pulls the plug. Let's see just how much furious optimism stocks will have in that case.