The markets had nothing to go on other than hope and wishful thinking that Greece will be saved and remain in the European Union, while speculation grew that China may throw an assist to Europe’s indebted nations.
However, skepticism set in towards the end of the trading day, as cooler heads prevailed by concluding that today may have been just a short-term bounce and that Greece will default on its bond anyway and very likely take a few banks down with it.
Optimistic statements from German chancellor Merkel and her French counterpart supported the rally and also Treasury Secretary Geithner’s forecast that Europe will not see a major financial collapse added some stability in the market place.
It sounds to me that these optimistic calls were very necessary, in order to avoid a market selloff, as Greek 1-year bonds now yield an astonishing 141%. Could it be that the bond markets are more in tune with the reality that Greece will have to default sooner or later?
Volatility at the opening was the result of Moody’s downgrading two of France’s big banks with others likely to follow. Short selling and short covering contributed to the swings early on and towards the close.
As an aside, a weak retail sales report, showing no change from the prior month, was disappointing but the excuses rolled in that Augusts’ stock market turmoil, along with hurricane worries, proved to be disruptive. Sounds as good a reason as any, as long as we do not admit that the economy is actually not growing but slipping and sliding.
Right now, it does not matter to the markets, but eventually it will. The focus remains on the issues in Europe, and I expect that to continue along with increased market volatility.