Tuesday, May 24, 2011
We have started seeing the word ‘default’ and ‘Greek debt’ being used in the same sentence for the first time. And this has to count as an improvement in the overall discourse on the European debt problem. The debate is hardly settled, but this is exactly what should constitute the core of the debate.
The markets are already pricing some measure of Greek default if we look at the yields on Greek government bonds. And the political elites in Europe appear to be coming around to that view as well, though the European Central Bank (ECB) is standing in the way. We also have one of the rating agencies come out this morning and claim that a Greek default will have a cascading effect on the other bailed out states (Ireland & Portugal).
Default is never painless and the Greek version wouldn’t be either. But the alternative of long and painful austerity measures, not to mention forced sales of public assets, may not cut it in the end.
But why would U.S. stocks get spooked the way they did on Monday by this unfolding Greek drama? My feeling is that it is the backdrop of the ‘growth debate’ that makes the resumption of the European debt issue more unsettling for stocks. We will likely see some of those losses get reversed today, but the fear is far from over.
The market has been fixated lately on the near-term growth momentum of the U.S. economy following the first quarter’s sub-par growth pace. A spate of recent data on the manufacturing, consumer, and housing ends of the economy has added to fears that the first quarter’s modest growth momentum may have carried into the current quarter as well.
Today’s new home sales numbers and Wednesday’s Durable Goods report will be key data points in this ongoing debate, but are unlikely to definitively settle it one or the other. The growth debate also encompasses China, where the authorities are battling inflationary pressures through a combination of monetary tightening and administrative measures. The recent turmoil in the commodity markets reflects these China growth jitters.
Of the handful of earnings reports this morning, we had solid earnings and revenue beats from AutoZone (AZO), the nation’s largest auto dealer and footwear retailer DSW (DSW). In other news, American International Group (AIG) is expected to raise about $9 billion through the sale of 300 million shares. Roughly two thirds of the sale proceeds will go to the U.S. Treasury, which is trying to unwind its massive stake in the insurer.
We should likely brace ourselves for turbulent summer months as the domestic as well as international backdrop will remain unsettling for stocks. The long-term outlook, beyond the summer months, however, remains favorable.
Sheraz Mian
Director of Research
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