MarketView for June 20

Summary  

The major equity indexes moved higher on Monday, as the latest development to reduce Greece's debt helped draw buyers and the S&P 500 touched a key support level, but anemic volume signaled the recent weakness may not be over. Share prices recovered from their early losses as the S&P 500 moved downward toward 1,259, its 200-day moving average, which is often viewed as a pivotal point in determining the market's direction. A drop below that level would be the first since September 2010.

The moves higher may have been slightly exaggerated due to thin volume. Just 5.66 billion shares changed hands on the major equity exchanges, compared with a daily average of 7.58 billion.

Euro-zone finance ministers gave Greece two weeks from Monday to approve stricter austerity measures in return for another 12 billion euros in emergency loans, piling pressure on Athens to get its ragged finances in order. The euro-zone finance ministers expect the money, the next tranche in a 110-billion-euro bailout of Greece by the European Union and the International Monetary Fund, to be paid by mid-July. Greece needs the loans by then to avoid a debt default.

Despite the development, financials were the S&P 500's weakest sector. Shares declined after Citigroup cut price targets on a number of banks, including Goldman Sachs, citing a tough regulatory environment. Goldman ended the day down 1.5 percent to close at $135.14, while Morgan Stanley fell 1.9 percent to close at $22.39.

The S&P 500 is up about 22 percent since the end of August, but has pulled back in recent weeks amid signs that the U.S. economic recovery is faltering.

The CBOE Volatility Index lost 8.5 percent, its largest daily percentage drop since March 21.

The Food and Drug Administration approved a tamper-resistant pain drug from Pfizer and Acura Pharmaceuticals. Acura rose 16.3 percent to close at $4.50, while shares of Pfizer, a Dow component, were up 0.05 percent to close at $20.27.

In the consumer discretionary sector, Wal-Mart closed up 0.4 percent at $53.04 after the Supreme Court ruled for the retail giant in the largest sex-discrimination lawsuit in history, saying class-action status for female employees seeking billions of dollars had been improperly granted.

EU to Greece – Two Weeks or Else

Euro zone finance ministers gave Greece two weeks from Monday to approve further spending cuts and tax increases in exchange for another 12 billion euros in emergency loans, making it clear to Athens to get its finances in order. After two days of crisis talks, the ministers effectively issued Athens an ultimatum, saying the Greek government, parliament and broader society had until July 3 to approve a new austerity package that includes privatization measures in order to secure the release of the next tranche of EU/IMF aid.

Greece risks defaulting on its debts if the next tranche, the fifth installment of 110 billion euros ($155 billion) of loans agreed with Athens in May 2010, is not released in time.

Finance ministers from the Group of Seven industrialized nations held a second conference call on Monday after discussing on Sunday night the potential impact on global financial markets if Greece were to default. Both calls were organized by French Finance Minister Christine Lagarde, the leading candidate to become the IMF's new CEO this month.

"We have a calendar; we have a roadmap," Lagarde told reporters in Luxembourg. "Efforts have to be undertaken, in the first place by Greece, which leaves here knowing that it has considerable parliamentary efforts to make."

In Washington, the White House restated its view that the crisis could pose a risk to fragile economic recoveries around the world if it spins out of control, but that the mechanism exists to contain it.

Greece's newly appointed finance minister, Evangelos Venizelos, issued a statement saying he would strive to ensure the already reworked austerity program was approved, possibly by June 28.

"The overriding aim is to develop a clear relationship of trust, to stabilize the situation, to have a disbursement of the fifth installment,” Venizelos said. “The political time has been compressed a lot. Each day is of extreme importance and hence we cannot afford to waste a single hour."

The ministers also increased the effective lending capacity of the current bailout fund, the EFSF, to 440 billion euros by increasing guarantees. And they said the European Stability Mechanism, the permanent crisis fund that will replace the EFSF from June 2013, would not have preferred creditor status when it comes to loans to Greece, Ireland and Portugal, a change that eased concerns among private creditors about its structure.

Meanwhile, Greek legislators debated the highly unpopular plans, which aim to produce a further 6.5 billion euros in budget savings this year, and 28 billion through 2015, and raise 50 billion euros from the sale of state assets.

On Sunday, Prime Minister George Papandreou appealed to the nation to accept steps that certainly in the short term will make life harder for most citizens.

"The consequences of a violent bankruptcy or exit from the euro would be immediately catastrophic for households, the banks and the country's credibility," Papandreou said at the start of a confidence debate on his new crisis cabinet.

Although many expect protests in Greece to die down and the package eventually approved, one Greek newspaper on Monday said the EU had treated Greece poorly.

Blaming "the stupidity of Europeans," the Eleftherotypia newspaper wrote in an editorial:

"Today it's at risk of becoming Europe's little whore. If the euro's 17 members do not understand that to save their economy they must become one federation, the euro will collapse and with it half of its economies."

Inspectors from the EU and IMF will make a further visit to Athens this week -- having just completed an inspection -- to examine changes the country wants to make to the plan.

Meanwhile, the euro weakened against the dollar marginally on Monday and the cost of insuring Greek and Italian debt against default rose, a reflection of the increasing risk of contagion across highly indebted euro zone states from Greece's problems. Ratings agency Moody's said on Friday it could downgrade Italy's Aa2 rating in the next 90 days given concerns Greece's crisis could derail Italy's tepid recovery.

While it seems likely that Athens will eventually get the next tranche, as well as a further emergency loan program of around 120 billion euros up to the end of 2014, the net result is only to buy Greece more time -- the possibility of a debt restructuring in the longer-term, or even default on a portion of its debt, has not gone away.

After their meeting into the early hours of Monday, the euro zone ministers announced that they were ready to put together a second package of loans for Greece, despite the country having missed debt targets in the first package.

The second package, to be outlined by mid-July, will include more official loans and, for the first time, a contribution by private investors, who will be expected to voluntarily purchase new Greek bonds as existing ones mature.