[Chart courtesy of MarketWatch.com]
With Greece making headway in its bailout deal today, the S&P 500 had a minor gain of 0.15% while European markets finished on the upside. The Euro also edged up to $1.33/Euro.
And once again, the 10-year Treasury breached the 2% level, finishing at a yield of 2.05%. It looks like the Greek news tempered investor fear for the time being, but it doesn’t mean that risk has substantially dissipated.
After a tussle amongst various political parties, Greece agreed to a roughly $4.3 billion austerity package as it seeks to demonstrate it can reign in fiscal discipline. While no guarantee that this measure will help Greece receive its bailout payment, it sure increases Greece’s chances.
However, there’s a lot of negotiating left and plenty of things that can still go wrong, leaving Greece in the danger zone where it has only bought itself some extra time.
With default still a possible outcome down the road, Greece is going to need some serious outside help. For instance, ECB President Mario Draghi has considered redistributing profits from a sale of its Greek bond holds to help in the bailout effort. In the meantime, Greece needs to convince Eurozone finance ministers that it deserves bailout funds.
Meanwhile, the ECB decided to keep interest rates at 1%. However, given the continued difficulties in European credit markets, a decrease in rates not unlike to what the Fed has done would likely prove to be more advantageous.
Worries concerning future inflation due to extend low rates are justified, but the Eurozone’s present debt woes are more pressing in my opinion. Not to mention, debt deflation would make matters worse. If the U.S. and England are pursuing quantitative easing to try and get out of their economic doldrums, I don’t see why the Eurozone can’t give it a shot.
In the U.S., housing difficulties persist. According to a real estate report from Zillow, home prices in 2011 dropped 4.7% with further drops expected this year. As I’ve stressed and as was mentioned by Bernanke this week, a U.S. economic recovery won’t happen until employment and housing dramatically pick up.
While my long-term outlook remains bearish given developments in Europe, it’s imperative to take advantage of short-term upside opportunities. Please take a look at my weekly ETF model portfolios as guidance to see how you can properly position your portfolio.