MarketView for November 7

 

 

 

Summary

 

It was by any standard a volatile day on Wall Street, characterized by light volume, which always makes trading securities all that much more difficult. Approximately 6.3 billion shares changed hands on the three major equity exchanges on Monday, a number that was well below last year's daily average of 8.47 billion shares traded. The CBOE Volatility Index VIX fell 0.9 percent after rising earlier in the session.

 

This low volume – high volatility difficulty is magnified when there is a continuing shift in Street attitudes with the latest headline from Europe. Equities have been very sensitive to headlines from Europe, especially with a light U.S. economic calendar this week and as earnings season winds down. As a result, the Street spent most of the session lower before rebounding after Juergen Stark, a member of the European Central Bank's Executive Board, said the region's debt crisis might be overcome in "one or two years at the latest."

 

In a signal that investors remain cautious, the strongest performers were healthcare and telecommunications stocks, both considered defensive sectors, with Pfizer Igaining 2.1 percent to close at $20.07. Volatility in the stock market has become more closely correlated with shifts in European bond markets, another sign of Europe's influence on the equity markets.

 

The latest source of anxiety is Italy, where Prime Minister Silvio Berlusconi defied pressure to resign, keeping markets on edge before a key parliamentary vote on budget reforms.

Italian government bond yields rose to their highest since 1997 as political turmoil in Rome threatened to drag the euro zone's third-largest economy deeper into the region's debt crisis.

 

Adding to the uncertainty, Greece's outgoing Socialist prime minister and conservative opposition leader raced to forge a coalition government and implement a new bailout program.

 

Consumer electronics chain Best Buy Co Inc lost 3.1 percent to $26.46 after the consumer electronics chain said it was buying British partner Carphone Warehouse Group Plc for $1.3 billion and scrapping plans for a chain of European megastores.

 

Your Options Are Over Says Germany

 

Greece must push through economic reforms or leave the euro, Germany's economy minister said an interview published on Monday, adding Germany could not hold a referendum on whether to fund further euro zone bailouts.

 

"The Greeks have a choice: reforms within the euro zone or no reforms and leave. There is no third way," Philipp Roesler, who is head of the junior partner in Chancellor Angela Merkel's center-right coalition, told the mass-circulation daily Bild.

 

Asked if he thought the Greeks were "ungrateful," Roesler replied: "The Greek government must at least understand that at some point our patience will end."

 

The EU has told Greece's bickering politicians to explain by Monday evening how they plan to form a unity government to get the country's bailout program back on track, following Prime Minister George Papandreou's disastrous attempt to put it to a referendum.

 

Roesler, asked by Bild if Germany could hold a referendum on whether to extend further aid to Greece, said he "could imagine" a popular vote on issues such has giving up more decision-making competences to the European Union.

 

"But legally we are not allowed to hold referendums on financial questions. Such votes could be subject to populist abuse," said Roesler.

 

Some of the more euro skeptic elements of his party, who have put forward a motion to stop any further help for Greece at a party congress in Frankfurt next weekend, argue the German people should be consulted more directly on such issues.

 

Greeks Reach Agreement

 

Greeks awaited word on Monday on the formation of a unity government under a new leader after Prime Minister George A. Papandreou and his chief rival agreed to create a transitional administration to oversee the country’s debt-relief deal with the European Union and then hold early elections. Mr. Papandreou agreed to resign once the details were completed.

 

The agreement on Sunday appeared to break a political deadlock that had paralyzed Greece in the face of an acute financial crisis that threatened to infect other euro-zone nations, especially Italy. European leaders see the debt-relief deal struck with Greece on Oct. 26 as crucial to containing the crisis in Greece and insulating Italy, a much larger economy whose political leaders have also struggled to cut budgets and deal with heavy debt.

 

Yields on Italian bonds — the price Italy must pay to borrow money on international markets — rose on Monday to over 6.6 percent, the highest since the introduction of the euro more than a decade ago, news reports said.

 

But in a statement reported by the ANSA news agency, Mr. Berlusconi said talk of his resignation before a crucial parliamentary vote on Tuesday was “without foundation.”

 

The agreement in Greece could not have come soon enough for its European partners, who have pressed the country hard to forge a broader political consensus behind the debt deal. But it was not clear whether the agreement would provide the certainty that skeptical investors are demanding to calm turbulent financial markets.

 

The debt deal requires that the Greek Parliament pass a new round of deeply unpopular austerity measures, including layoffs of government workers, in a climate of growing social unrest. It also calls for permanent foreign monitoring in Greece to ensure that it makes good on its pledges of structural changes to revitalize its economy, a requirement that many Greeks see as an affront to national sovereignty.

 

With a narrow and eroding majority in Parliament, Mr. Papandreou’s Socialist government found that it could not unify to push through such measures on its own, but Antonis Samaras, the leader of the conservative New Democracy party, opposed many of the debt deal’s provisions and demanded Mr. Papandreou’s resignation and a snap election. After days of frantic political wrangling, Mr. Papandreou survived a confidence vote in Parliament on Friday, setting the stage for Sunday’s compromise.

 

The new unity government, in which the major parties would share power, is widely expected to be led by a nonpolitician and to govern for several months, long enough to carry out the debt deal and pass a budget for 2011. The name of the new prime minister and the composition of the new cabinet were not expected to be announced until Monday, when the leaders will meet again, according to a statement Sunday night by the Greek president, Karolos Papoulias, who moderated the talks on Sunday.

 

In a statement early Monday morning, the Greek Finance Ministry said that delegations from the Socialist Party and New Democracy met on Sunday “to discuss the time frame of the actions” to implement the debt deal, and added that the two parties regarded Feb. 19 as “the most appropriate date for elections.”

 

In reaching the agreement, Mr. Papandreou agreed to meet Mr. Samaras’s demand that he step down as prime minister, while Mr. Samaras agreed to back the debt deal and a seven-point plan of priorities proposed by Mr. Papandreou that would essentially commit the new government to the terms of the debt deal.

 

Mr. Samaras is not expected to play a role in the unity government, but would be New Democracy’s candidate for prime minister in the general election.

 

In many ways, a new interim government for Greece buys time for European leaders to put together a stronger bailout mechanism that would protect larger economies from the risk of default, chief among them Italy. High debt, low growth and Mr. Berlusconi’s diminishing credibility have made that nation increasingly vulnerable.

 

“The decision is very positive, because it will appease the markets and because it shows that Greek authorities are doing what foreign leaders want them to do — to get on with implementing the conditions for the E.U. debt deal,” said Athanassios Papandropoulos, an economist and commentator for the conservative Greek newspaper Estia.

 

Still, he said, he saw little chance that a unity government could get Greece back on the road to economic, political and social recovery. “I don’t think it will work,” Mr. Papandropoulos said. “It will last three months, then we’ll have elections, and then we’ll have the same problems all over again.”

 

Greece has rarely had unity governments. A civil war between right and left in the late 1940s left its political culture deeply divided, and it remains so nearly 40 years after the fall of a military dictatorship. But the dire economic situation has pushed Greece into uncharted territory.

 

In an unusually direct ultimatum to Greece, the European Union commissioner for economic affairs, Olli Rehn, said Sunday that finance ministers from the 17 countries in the union that use the euro were expecting the announcement of a unity government before their meeting in Brussels on Monday. Evangelos Venizelos, the Greek finance minister and a key figure in the Socialist government, is scheduled to attend the meeting.

 

In his efforts to head off the fall of his government and to maneuver Mr. Samaras into backing the debt deal, Mr. Papandreou proposed last week that the debt deal be put to a popular referendum. After the plan threw financial markets into turmoil and European leaders reacted with fury, Mr. Papandreou withdrew the idea, but won a reversal from Mr. Samaras on the debt deal.

 

One name being mentioned as a possible leader of the new unity government is Lucas Papademos, a former governor of the Bank of Greece. Mr. Papademos is a former vice president of the European Central Bank who has been teaching at the Kennedy School of Government at Harvard since his retirement in 2010.

 

After leaving the European Central Bank, he acted as an informal adviser to Mr. Papandreou but turned down an offer to be finance minister last spring, not wanting to lose his above-the-political-fray status in Greece.

 

 That independence, and his credibility in Europe, have made him a leading candidate to head a unity government.

 

 It was during his last year at the European Central Bank that the Greek debt crisis flared and he became well known for supporting a hard-line policy advanced by the bank’s president, Jean-Claude Trichet, that Greece should never default on its debt.

 

 Now, the tables for Mr. Papademos have turned and if he were to head the new government, he would have to support the 50-percent debt reduction proposal that lies at the heart of Greece’s new deal with Europe.

 

One crucial advantage in Mr. Papademos’s favor is that he is a close friend of the new president of the European Central Bank, Mario Draghi, not just from their time at the central bank, but from their days at the Massachusetts Institute of Technology in the late 1970s when they took classes and socialized together.

 

The new unity government will have its work cut out for it. Among the items on the seven-point plan Mr. Papandreou presented are completing the legal and financial terms of private sector involvement in the Greek rescue, in which banks holding Greek debt agree to voluntarily forgive much of its face value, to avoid a default.

 

The government also faces the challenge of securing the release of a new installment of 20 billion euros ($28 billion) in foreign aid that Greece needs by the end of February to stabilize its finances.

 

And it must approve the austerity measures that Mr. Papandreou’s government accepted in its talks with the “troika” of foreign lenders — the European Commission, the European Central Bank and the International Monetary Fund. The layoffs and other cutbacks of Greece’s public sector are likely to generate more angry street demonstrations.

 

The new government’s success “will depend on the stance labor unions will take,” said Babis Papadimitriou, a political analyst for the daily newspaper Kathimerini and for Skai television. “This will be, maybe, one of the most interesting developments: what will be the relations between unions and the main parties.”

 

Berlusconi About Done

 

Italian Prime Minister Silvio Berlusconi, under huge pressure from international markets and rebels in his party, tried to play his last cards on Monday to hang on to power and denied reports that he might resign shortly.

 

Reports of a possible resignation had an immediate impact, boosting stock and government bond markets dismayed with the political disarray in Italy, which has dramatically worsened the euro zone debt crisis. However, a denial by Berlusconi reversed the direction, indicating just how much markets would like to see him depart.

 

Earlier, Giuliano Ferrara, editor of the Foglio newspaper and a former minister seen as extremely close to Berlusconi, said on his website: "That Silvio Berlusconi is about to resign is clear. It is a question of hours, some say of minutes."

 

Franco Bechis, deputy editor of the center-right Libero newspaper, also said on Twitter that the 75-year-old media magnate would resign on Monday night or Tuesday morning.

 

But Berlusconi said, "Rumors of my resignation are baseless."

 

Earlier on Monday, benchmark government bond yields rose to their highest since 1997 at 6.67 percent. Many analysts say yields above 7 percent would make funding costs unsustainable for Italy's huge public debt, one of the highest in the world.

 

As recently as Sunday Berlusconi vowed to stay in power and denied that a party rebellion had robbed him of a workable majority. He and his closest aides spent the weekend trying to win back the support of enough deputies to avoid humiliating defeat on Tuesday in a vote to confirm a state financing bill which he has already lost once.

 

Apart from offering wavering deputies government jobs, Berlusconi is branding rebels as traitors to Italy at a moment of crisis and saying that if he falls the country must go to early elections, something many ruling deputies do not want.

 

Defeat in Tuesday's vote is thought likely to lead either to his immediate resignation or to an order from President Giorgio Napolitano to call a confidence vote. In addition, Italy's center-left opposition says it is preparing a no-confidence motion in Berlusconi. It may abstain in the pending vote to expose Berlusconi's lack of support without torpedoing an essential measure.

 

Interior Minister Roberto Maroni, a senior member of Berlusconi's coalition ally the Northern League, said the writing seemed to be on the wall.

 

"The latest news leads me to think that the majority no longer exists and that it is useless (for Berlusconi) to be obstinate, " Maroni said. The League also says early elections are the only course if the government falls.

 

Newspapers have estimated the number of potential defectors at between 20 and 40, which would be more than enough to topple the government.

 

Berlusconi has been meeting and telephoning rebels since he returned from a humiliating G20 summit in France on Friday in which he had to agree to IMF monitoring of Italy's progress in reforms he has long promised but so far not implemented.

 

Italy has the third biggest economy in the euro zone and its political turmoil and debt worries are seen as a huge threat in the wider crisis facing the continent's single currency.

 

Government bond prices would recover and the yield spread would fall by a full percentage point if the government should fall, according to a Reuters survey of 10 fund managers, market analysts and strategists last week.