U.S. equity markets are called higher this morning. After selling off early in the trading session, global stock markets turned positive after Greece announced that it was going to activate the loan mechanism proposed by the EU/IMF. This triggered renewed demand for risk as it temporarily took a major investor concern off the table. Trading conditions could be volatile today as details of the bailout plan are released throughout the day.
Yesterday President Obama’s speech on government regulation was not as harsh as traders expected. This helped turn the market around late in the session after an early profit-taking setback. The Greek developments overnight have calmed the markets somewhat meaning earnings and economic news may carry more weight today.
Durable Goods gets reported today. Traders want to see if this report reflects renewed consumer spending. At 9am CDT, New Home Sales will be reported. On Thursday, existing home sales helped contribute to the rally. Today traders want to see if a trend is developing in the housing market.
Yesterday’s closing price reversal top in the June Treasury Bonds was confirmed overnight. The easing of tensions in Greece helped traders take risk off the table. Downside pressure could take this market to 116’15 over the near-term. It’s all about risk today. If trader sense risk developing then look for T-Bonds to rally. If traders shun risk then look for further downside pressure.
June Gold traders are taking a “wait and see” attitude this morning. Traders are trying to digest exactly what is going on between the EU and Greece. If traders sense the Euro is on the brink of collapse then speculators will buy gold. Gold may also stabilize if the Dollar weakens substantially. June gold is actually trading as if it expects the Dollar to strengthen throughout the day as new shorts get placed on the Euro.
June Crude Oil is steady overnight. Traders know the rally in the Euro is short-covering. Like the gold traders, they are assessing the EU/Greek situation. Technically, the chart pattern indicates impending volatility. A rally through 84.64 will trigger a sharp break to the upside. A break through 82.05 is likely to fuel a collapse.
The week long surge in borrowing costs finally forced Greece to formally ask to tap the 45 billion Euro ($60 billion) rescue package provided by the European Union and the International Monetary Fund.
The unprecedented move by Greece threatens both the Euro’s stability and the structure of the European Union. Traders are now asking if Greece gets the money then what about Spain, Portugal and Ireland. Many feel that these three countries are next in line for a rescue as debt problems spread across Europe. Based on current developments, the very existence of the Euro is now being questioned.
When the Euro was created a little over 11 years ago, the founding fathers gave the European Central Bank the power to control interest rates and fiscal responsibility to the individual countries. The current crisis has threatened the cohesion of the European Union as many member countries have turned their back on the sovereign debt problems of struggling member nations. These “solvent” nations are going to have to be convinced that the Euro is worth saving by ponying up the funds necessary to save the economies of the struggling members or risk debt default and the collapse of the Euro.
With the cost to service its debt sky-rocketing everyday, Greek Prime Minister George Papandreou had no choice but to ask for the money. After reaching unsustainable levels that were destroying the efforts by the Greek government to cut its budget deficit, Greece had to cave in and make the request for bailout funding. As of last night, the cost to finance 5-year Greek credit default swaps soared to 623 basis points before settling at 590 bp after the rumors of the activation of the rescue plan began to circulate.
Although the Euro rallied in a short-covering rally as news broke of the bailout, investors still have to be pessimistic about the viability of the Euro. The main concern at this time is the inability of the European Union to come up with concrete rules regarding the terms of the bailout loans. Prior to the bailout proposal being put together in haste earlier in the month, the EU had no such plan. In looking-back, it looks as if that plan was not designed to strengthen the Euro, but to stem the pace of its decline.
Now that Plan A has failed, the prospects for Plan B do not look that much better as EU members appear to be making up this plan as they go along. The trick is going to be trying to convince the solvent EU members that Greece is worth saving. Furthermore, the EU member are most likely going to have to consider putting together a plan which also provides aid for Spain, Portugal and Ireland or any other nation that will need aid. The second part of the equation may be considering booting all of these struggling nations out of the club since it has already been proven that despite austere measures to shore up the budget, the capital markets are really controlling the show.
Traders and investors want clarity at this point. They want to have a fully understandable mechanism plan in place as soon as possible to prevent the collapse of the Euro. If history gives us any clues, however, the EU will drag its feet and fail to live up to its responsibility as a partner. Germany especially will be the biggest hurdle for Greece and the other sovereign nations to overcome. Not only are the Germans against any kind of bailout plan, but the Greek citizens feel that a bailout will make them appear weak to the global community. This means that eventually the next bailout plan will fall squarely in the hands of the International Monetary Fund. 
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