The Greek parliament approved the austerity measures and the cheers spread to the US markets with each benchmarks posting modest gains. Markets returned to the positive territory as investors learnt about the improving odds of Greece securing the next tranche of bailout package from the troika of international lenders. However, following the approval of the austerity measures, there was widespread violence on the streets of Athens and the social unrest does not promise a rosy road ahead for Greece and its financial situation.
The Dow Jones Industrial Average (DJI) was up 0.6% and closed the day at 12,874.04. The Standard & Poor 500 (S&P 500) finished yesterday’s trading session at 1,351.77, after climbing 0.7%. The Nasdaq Composite Index inched up almost a percentage to settle at 2,931.39. Consolidated volumes on the New York Stock Exchange, the Nasdaq and Amex were 5.97 billion shares, significantly lower than last year’s daily average of about 7.84 billion shares. The advancers outnumbered the decliners on the NYSE by a ratio of 3:1.
The fear-gauge CBOE Volatility Index had surged 11% last Friday spooked by incremental fears of Greek debt, as the euro-zone ministers demanded an additional austerity measure. While things looked gloomy on Friday, the 11% jump was the VIX’s biggest jump in three months and the index moved above 20 for the first time in two weeks. If it was the Greek concern that took the VIX higher, it was again cross-Atlantic developments that led dragged the fear-index down by 8.4% to 19.04.
Talking of Greece’s developments, on Sunday, the Greek parliament approved the austerity package and almost cleared the hurdles for the nation to secure the $172 billion bailout package. The US markets surged following this news as investors had finally got a better sign from Greece, a nation that had been fighting the odds for the financial aid. Last week, things looked sorted as Greek leaders prepared a list of austerity measures. However, markets were battered on Friday as Euro-zone leaders asked for an additional EUR325 million or $430 million cuts to the year’s budget in and over the already agreed EUR3.3 billion package. But now, the parliament has approved the drastic spending cuts that include severe cuts in pensions, jobs, wages and welfare. This conceivably is the price that Greece has to pay in order to get the next tranche, and save itself from defaulting on its debt.
The economic scenario in Greece was thought to be settled for the moment after the approval of the austerity measures. Greek government is hopeful of securing the bailout package, not defaulting on its debt and will likely not have to exit the euro. However, as investors cheered the passing of the painful austerity measures, Athens erupted into street violence with protests around the capital, unfortunately promising political disorder and social unrest.
Social unrests do hamper any economy and this one is likely powerful enough to deter the austerity measures. Greek politicians and economists supported the view that the political unrest denting the course of the strict economic measures. Greece awaits its election in April and with the political discord the austerity measures will be severely challenged. Quoting a currency strategist at Commerzbank: “Considering the explosive situation in Greece it would hardly come as a surprise if those opposing the reforms were to take control of the country in April. In that case everything would start all over again, as each tranche of the bailout package has to be released individually”.
A senior socialist politician spoke of the intensifying scenario and said: “The message is very worrying”. Markets did shake off the concerns boosted by the social unrest yesterday, but the road ahead is a bit uncertain and the politician said: “As long as the economic crisis persists, there is lack of trust in the government and unemployment continues to go up, the social unrest will grow”.
The day lacked action on the domestic front and the markets’ direction was dominated by the cross-Atlantic happenings. Looking at the sectors, financial enjoyed decent gains and the Financial Select Sector SPDR (XLF) fund was up 0.9%. Among the banking stocks, JPMorgan Chase & Co. (NYSE:JPM), U.S. Bancorp (NYSE:USB), Wells Fargo & Company (NYSE:WFC) and UBS AG (USA) (NYSE:UBS) gained 1.8%, 0.6%, 1.2% and 2.0%, respectively.
To read this article on Zacks.com click here.
Zacks Investment Research
