Sep 19: Greece Fears Are Back – Economic Highlights

Renewed Greece-related headlines are expected to come in the way of the budding stock market rally. Stocks gained almost 5% last week as some of the more dire scenarios about Europe lost ground following concerted action by global central banks, including the U.S. Fed, to prop up the liquidity of European banks.

The overall tone of public statements from EU officials, particularly about Greece, also appeared to soften up a bit. But the weekend meeting of EU finance ministers, with guest appearance from Tim Geithner, failed to provide a unified stance on the core issues bedeviling the currency union.

As a result, we start this week with fresh worries about Greece’s ability to get the next tranche of funding. Greece does not have the liquidity to keep operating beyond just a few weeks if it fails to get the next payment tranche. Greece’s creditors apparently are not convinced that it has done all it needed to do to qualify for the payment. We will have to wait and see what comes out of this latest round of wrangling between the Greeks and its creditors. But one thing is for sure, it will keep the markets on edge.

The market will also be watching closely the Fed’s two-day meeting this week. The expectation is that the Fed will initiate the so-called ‘Operation Twist’ following this meeting, which will be aimed at changing the composition of its balance sheet towards more longer-dated securities. This is expected to result in bringing down the interest rate on long-term Treasury bonds, which will in turn have a beneficial effect on the broader economy. The idea is fine in theory, but with yields on 10-year Treasury bonds in the 2% vicinity, it is difficult to envision further yield compression.

In corporate news, Tyco International (TYC) announced plans to split its security, fire protection, and flow-control divisions into separate companies. The conglomerate corporate structure appears to be going out of favor as a number of well known conglomerates, ranging from McGraw-Hill (MHP) to ITT Corp (ITT), have announced plans to split themselves up.

Netflix (NFLX) is also planning to separate its DVD-by-mail business from the streaming service and organizing it as a separate subsidiary to be called Qwikster. The move is part of the company’s efforts to navigate the transition from the old media to the new and follows recent pricing changes that appear to have weighed on its subscriber growth.

In unconfirmed media reports, United Technologies (UTX) is reportedly mulling a bid to acquire aerospace components maker Goodrich Corp (GR). If realized, this would be the largest deal for United in over a decade and would represent a new round of consolidation in the aerospace sector.

These relatively favorable corporate news stories notwithstanding, the dominant theme will likely remain Greece related fears today. And we all know how the market responds when those concerns come to the front.