Monday May 4

Stocks rise after corporate headlines. The S&P 500 and the Dow both add 0.3% to 2,114 and 18,070 respectively. News reports today show that Comcast is increasing its stock buyback, Tysons earnings beat expectations, and financial stocks such as Berkshire Hathaway, JP Morgan, and BoAML all rise. Analysts now predict a 1Q drop in earnings of 0.4% which is improved from a 4.3% expected drop which was predicted as recently as April 17. In addition, factory orders rose 2.1% in March, which supported the optimistic tone in markets. The U.S. dollar index rises 0.2% while the ten year yield rises to 2.14%. Brent oil rises to $67, which reduces deflationary expectations around the world. To reflect this, the bund yield rises to 0.42%. Weak Chinese data also supports stimulus hopes in the region.

Many analysts note that the Greek crisis is not adequately priced into European bond markets. This could reflect possible complacency with the situation that has been ongoing and recurring headlines since the beginning of the year. Yields in peripheral eurozone countries such as Portugal, Spain, and Italy are low, which does not represent much downside risk. Corporate yields are also low, and these bonds have less of a cushion against losses since they are not being purchased by the ECB as a part of the QE program. For example, in Spain investment grade companies on average have bonds that yield 0.2% compared to 2012 when similar bonds yielded 6.7%. In this way bond markets are not adequately showing how far apart Greece and its creditors are on a potential deal.

Greece is struggling to meet terms set by its creditors which would unlock funding that is part of the €172B bailout package. Greece is losing support from the IMF, which may hold back its portion of the €7.2B payment. Without this funding, Greece is expected to run out of cash in the near future, possibly by the end of this month. Recent reports show that the struggling country is in fact on track for a 1.5% deficit versus expectations for a 3% surplus. Negotiators struggle between drastic austerity measures (which Greece strongly opposes) or debt writeoffs (which creditors oppose). Greece’s rising deficits raise the projection for Greece’s need in the new bailout, which was previously supposed to be between €30-50B assuming the country was running a 3% surplus.

Some analysts believe that a Grexit is the best solution for both parties. German and Greek negotiators both seem to be complacent to the possibility of a Grexit. For Greece, an exit from the eurozone would allow them to default and restructure their debt, in addition to allowing them to devalue their currency. A Grexit could lead to greater psychological liberation for the Greek people, and increase the level of trust between the government and its constituents. However in this scenario, the country would experience bank runs, strict capital controls, political extremes, and an increase in food and energy prices. For the rest of Europe, a Grexit would minimize cynicism and anger towards Greece across the continent. It would also show that the rules of the EU are firm, and therefore encourage other peripheral countries to meet reforms. One large concern is that other countries may soon follow if Greece is able to succeed on its own. In particular, opposition parties in Italy who oppose a single currency may gain support.

The potential for election uncertainty in the U.K. is being priced into currency markets. The one week pound/ dollar implied volatility gauge jumped to 17.8%. The volatility reflects uncertainty ahead of a potential hung decision. As a result the pound falls to $1.5108. Currency traders around the world are net short the pound relative to the dollar, as these positions will profit if the pound loses value. This positioning could also be a sign of long term dollar strength.

Monday May 4

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