Tuesday, June 30, 2015

Will distance from Greece save U.S. markets?

They say the only insulator against a magnetic force is distance. So is the United States far enough away from the pull of overseas financial calamity to remain safe?

Greece – on the cusp of default and a banking crisis - is pretty far away. China, where stocks have dropped more than 20% in weeks despite central bank rate cuts, is even more distant. Puerto Rico is just offshore, but the reality of its heaving debt load has been with us for so long that a leader calling them “not payable” doesn’t cut too close.
The means by which faraway market storms come to whip around U.S. stock prices is some form of contagion. This can occur when basic global banking and capital-market function is disturbed, or when many of the same people who own the collapsing assets also own stuff here and need to sell it to raise cash.
With Greece’s dire debt situation a drawn-out story that’s been with us for half a decade, its effects now seem largely sequestered from markets here.
China’s unstable yearlong market melt-up followed by the rapid panicky selloff is unnerving, and raises questions about the authorities’ ability to manage the economy and markets there. But the S&P 500 index (^GSPC) here has been largely flat over the past year as Shanghai stocks (000001.ss) doubled, so it’s hard to see why American stocks would feel much pain when they didn’t share in the pleasure.
Indeed, as noted here recently, the U.S. stock market has been where global volatility has gone to die this year, with large-cap indexes behaving almost as a sort of safe haven in a skittish world.
Aside from the sharp reflexive drop in European stock markets led lower by the banks and a shallow pullback in the value of the euro, the damage has so far been slight outside of Greece itself (where banks and markets are closed).
For now, relative calm in the market for Spanish government bonds – another “peripheral” market often lumped with Greece – seems to show that investors aren’t yet extrapolating much from Greece’s vulnerable limbo state.

The overnight drop in stock futures threatens to push the indexes below the lower end of their narrow recent range, but so far the break hasn’t been decisive.
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It may be that the main effect for most U.S. investors will be to stress test a few key market trends that have been in play for months now.
-The first is the powerful outperformance of European stocks versus the U.S. Central-bank stimulus in Europe has helped drive equities on the Continent (^STOXX) up more than 13% this year, versus about 2% for the S&P 500. U.S. investors have chased this outperformance by shifting hundreds of billions of dollars into European funds. The Greek endgame should be a gut check for the crowded “everybody loves Europe” trade.
-The next strong pattern that will be challenged is the steady rise of Treasury yields. The ten-year yield (^TNX) has been marching upward with impressive momentum for two months and closed Friday near a nine-month high at 2.48%. The flight to safety response over the weekend knocked the yield back below 2.35%, as German government yields likewise sank hard.
Aside from the fear spasm, the Greek turmoil will also complicate forecasts for when the Federal Reserve might raise interest rates, which was one factor pulling Treasury yields higher.
-Within the stock market, the yield lift was a boon to bank stocks, which have been among the strongest performers as net-interest spreads widened. They’ve become arguably an over-loved group. Watch for profit-taking in the big New York and regional banks.
-The Nasdaq (^IXIC) has been the true standout all year, up more than 7%. It’s as if the technology giants that dominate this index have taken on the role of financially sturdy, steadily growing entities so scarce in the world. Look for this bit of market anxiety to challenge – or prove out – the favored status of multinational growth companies largely immune to debt drama and wiggles in economic growth.
There’s a jokey line going around about how Apple should simply use its $180 billion in spare cash to buy Greece. While absurd and rather disrespectful to Greece, the idea has a kernel of truth about the entities that truly have financial staying power in today’s world.

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