After last Friday’s major gains, markets tempered quite a bit today as the S&P 500 barely dipped 0.04%. European and Asian indices didn’t move significantly either for the most part. In commodities, oil and gold haven’t greatly fluctuated as of late as well.
The 10-year Treasury yield fell down to 1.90% as it appears investors are slightly more on edge about Greece’s fate. The VIX might still be below 20, but there’s still plenty of risk on the table.
As Greece still hasn’t come to a deal with its bondholders, the prospect of default becomes increasingly likely. Even Greek PM Papademos wants his finance team to determine the potential effects of a default. And the rest of Europe is getting antsy over the matter. Merkel and Sarkozy both said that Greece needs to arrive at a resolution soon. If not, the market reaction could turn ugly.
In an interesting twist in Greece, France and Germany are proposing a new provision if Greece receives a bailout. They propose setting up a fund that would designate some bailout money for Greek bondholders rather than doling it all out to the Greeks. This plan would create a better incentive for Greece to keep its budget in order and institute credible fiscal reform. At least Greece has taken a step in the right direction by deciding to axe 15,000 government jobs.
Concerns linger over the European banking system with regards to capital shortfalls. There is speculation that a number of banks that submitted proposals for achieving capital adequacy might still not reach a necessary target of 9% tier one capital. With 30 banks that collectively need roughly $150 billion in capital to meet this target according to the European Banking Authority, the risk of another major bank facing a crisis could very well be possible.
A sign that some Eurozone countries are doing better than others, Germany’s manufacturing orders rose in December. Unfortunately, the rest of Europe is lagging economically.
And on the U.S. front, hopefully the Super Bowl was able to provide some much need GDP stimulus after less than stellar Q4 numbers.
Once again, we await a final outcome in Greece as talks keep coming to a standstill. With this in mind, it’s crucial to have a balanced bond/sector/equity ETF allocation, along with my recommended exit strategy, in case we see the downside impact sooner rather than later.