Investors keep eyes pinned on Greece

By Emily Jane Fox @CNNMoneyInvest

NEW YORK (CNNMoney) -- Investors across the globe wait with bated breath ahead of Sunday's pivotal elections in recession-ravaged Greece.

Victory for the far-left anti-austerity parties could unravel Greece's bailout, raising concern the country could exit the euro currency union. And that could drag down other ailing euro nations and send shock waves through the world's financial markets.

In the United States, stocks managed to end the week with modest gains as investors remained hopeful that Greece's elections would yield a resolution. The Dow (INDU) rose 0.9%, the S&P 500 (SPX) added 1% and the Nasdaq (COMP) picked up 1.3% on Friday.

All three indexes ended higher for a second straight week. The Dow jumped 1.7% and the S&P 500 rose 1.3% for the week, and the Nasdaq gained 0.5%.

Greece will be front and center as world leaders meet in Mexico on Monday for the Group of 20 summit. Analysts are expecting a lot of talk but not a lot of action. In other words, status quo as far as finding a definitive solution for Europe goes.

"It will make a lot of noise, but the most it will do is reiterate that Europe must fix its problem, and that it should come from within the European Union group," said Peter Cardillo, chief market economist at Rockwell Global Capital. "The real emphasis will be at the end of the month when we have an EU summit, where there will likely be some concrete moves."

Some analysts do expect more from the Federal Reserve when policymakers wrap up a two-day meeting Wednesday.

Investors will be listening carefully to Fed Chairman Ben Bernanke during his press conference following the meeting for clues about possible Fed action. There's speculation the central bank may extend Operation Twist, its program to swap short-term bonds for the longer-term Treasuries, or any other stimulus measures.

"There's a good possibility that the Fed will decide to extend Operation Twist, which is somewhat of a Band-Aid," said Timothy Ghriskey, chief investment officer at Solaris Asset Management.

"But economic data hasn't been weak enough to warrant any other significant action," he said.

Washington could send a jolt through the market early in the week, if the Supreme Court hands down a ruling on the Affordable Care Act. That could come as early as Monday.

While the court is focused primarily on the law's individual mandate provision, which requires most Americans to buy health insurance or face financial penalty, the justices could strike down the entire legislation.

Large insurers like UnitedHealth Group (UNH, Fortune 500), WellPoint (WLP, Fortune 500) and Aetna (AETNA) have a lot riding on the fate of the landmark law, which promises to remake the health insurance landscape. Its primary provisions are set to begin in 2014.

And JPMorgan Chase (JPM, Fortune 500) CEO Jamie Dimon will head back to Capitol Hill on Tuesday to testify before the House Financial Services Committee.

Dimon will field questions from lawmakers about the bank's risky financial bets that resulted in more than$2 billion in losses.

On the corporate front, Microsoft (MSFT, Fortune 500) is expected to make a tablet related announcement on Monday at an event in Los Angeles. 

Make-Or-Break Summit Looms As EU Preps For Greek Fallout

 By James Hertling - Jun 17, 2012 2:23 AM GMT+0400

Faced with Greek elections that threaten to result in only more disarray, European leaders are set to turn their attention to safeguarding the other 98 percent of the euro-area economy.

With investors and policy makers clamoring for clarity amidst what Bank of England Governor Mervyn King called a “black cloud” over the world economy, Europe’s chiefs are preparing for their fourth make-or-break summit in a year.

 “They need to signal and make difficult decisions as to what they want the composition and functioning of the euro zone to look like,” Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., told Bloomberg Television June 15. “The current form doesn’t work. There’s too many flaws.”

Before descending on Brussels June 28, leaders first need to overcome differences on politics and policy. French President Francois Hollande hosted members of Germany’s opposition last week as he pushes plans, which German Chancellor Angela Merkel rejects, to jointly guarantee debt and provide stimulus to counter recession in the 17-nation bloc. Spain’s foreign minister said June 14 that Germany helped trigger the crisis.

“Investors outside Europe lack confidence -- we feel this every day -- in Europe and the euro area,” Merkel said in a June 15 speech in Berlin. “But there’s also a lack of trust among the different actors. That trust must be restored.”

Merkel at G-20

Merkel, whose role as leader of Europe’s biggest economy gives her an effective veto on crisis-fighting policy, gets down to business at the summit of leaders from the Group of 20 nations beginning tomorrow in Los Cabos, Mexico. Global leaders will probably press her to give ground on her austerity-first policy, as they did at the G-8 summit last month.

Merkel then meets in Rome on June 22 with Hollande, Italian Prime Minister Mario Monti and Spanish Premier Mariano Rajoy, seeking to find common ground before the EU and euro-area summits at the end of the week.

“More important than the summit is the gathering of the big four,” said El-Erian. “They hold the key.”

The anticipation echoes the expectations that preceded gatherings last July 21, when a second bailout agreement for Greece was outlined; October 26, when bondholders accepted a Greek writedown and the euro rescue fund was beefed up; and Dec. 9, when new budget rules were adopted. None of those steps arrested the crisis.

Greek Gridlock

Today’s Greek elections carry the latest threat of stoking the turmoil, as polls show the anti-bailout Syriza party running neck-and-neck with New Democracy, which says a vote for Syriza risks a Greek euro exit. Polls also suggest no clear majority, bringing the prospect of further political gridlock.

The election is a week after Spain said it would seek a 100 billion-euro rescue for its banks, prompting concern Italy would be next to succumb.

“I don’t think the election results will determine the future of Europe, because I see scope for compromise from both sides,” Martin Blum, co-head of asset management at Ithuba Capital in Vienna, said in an e-mail. “I do think that contagion from Spain to Italy and the quality of the policy response at the EU summit will, however, be important in determining the future of Europe.”

The German chancellor gave a pair of speeches last week laying out her priorities for the Mexico summit that signaled she was staying the course.

‘Quick Solutions’

“Germany will not be persuaded of all those quick solutions such as euro bonds, stability bonds, a European deposit-insurance fund,” Merkel told small-business leaders in Berlin on June 15 to applause.

Since his election on May 6, Hollande has advocated moving toward euro bonds, echoing a position backed by Merkel’s domestic opposition and EU officials in Brussels.

“In the financial circles, few doubt that it makes economic sense to create a deep, liquid and stable market for government bonds with the joint issuance of public debt,” EU Economic and Monetary Affairs Commissioner Olli Rehn said June 15, according to the text of a speech prepared for a Goldman Sachs Group Inc. conference in Brussels that was closed to the press.

Monti has joined Hollande in calling for greater emphasis on policies that promote economic growth. On June 13, Monti said the summit needs to adopt a “credible package of growth measures” to reduce Italy’s borrowing costs.

Italy’s 10-year bonds yield reached 6.342 percent this week, the highest in almost five months, ending the week at 5.926 percent, 449 basis points more than comparable German debt.

Fiscal Union

The euro’s guardians will also debate a blueprint being devised that may chart the way out of the crisis and toward the full union that Merkel envisions. Drawn up by EU President Herman Van Rompuy, European Commission President Jose Barroso, Luxembourg Prime Minister Jean-Claude Juncker and European Central Bank President Mario Draghi, the plan may echo the euro’s 1989 roadmap set out by a panel led by then-European Commission President Jacques Delors.

“The important thing as far as we are concerned today is that this report in a sense spelled out a methodology,” Draghi told reporters June 6. “There was a road with dates, deadlines and conditions to be satisfied. I think that is part of the efforts that our leaders and we, ourselves have to draw up today.”

To contact the reporter on this story: James Hertling in Athens via jhertling@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

Whatever Greek Voters Decide, the Euro Looks Likely to Suffer

By NELSON D. SCHWARTZ

Published: June 16, 2012

It will be a late Sunday night for financial pros like Markus Krygier. In New York, London, Tokyo and beyond, nearly everyone is focused on one thing right now: Greece. To be precise, they are focused on a “Grexit” — the possibility of the country’s eventual exit from the euro. For many, the prospect has moved from “if” to “when.”

Related

The Greek elections on Sunday will chart the immediate course, one way or another, and investors like Mr. Krygier, a money manager in London, will be standing by to size up the results. On this side of the Atlantic, BlackBerries and iPhones will be at the ready during Father’s Day barbecues.

Who will prevail in Athens? Will it be Syriza, a coalition of leftist groups that has declared that it will annul the terms of Greece’s bailout? Or the center-right New Democracy, which says it will stick with austerity and keep Greece in the euro zone?

For the euro itself, it may not really matter much, at least in the medium term, says Mr. Krygier, who oversees $20 billion. He is betting that the euro, the currency of 17 nations from the Baltic to the Mediterranean, will eventually weaken, whatever the outcome on Sunday.

Mr. Krygier works for Amundi, a money management venture of two big French banks. And, like many others in the financial world, he says the euro will lose more value against the dollar. Even a euro-friendly election in Athens wouldn’t be enough to stem the pressure as long as nervous investors look to the dollar as a haven, he says. All the bailouts in Europe — two so far for Greece alone — have done little to contain the problems. The financial markets savaged Greece but have now moved on to bigger targets like Spain and Italy.

“The hundred billion bought us two hours of relief, and then interest rates began to go up again and markets began to zoom in on Italy,” Mr. Krygier says, referring to last weekend’s 100 billion euro bailout for Spanish banks. “It has become a systemic issue. Until we see a lasting resolution of those doubts, we feel the euro will remain under pressure.”

On that point, many professional investors and traders agree. The euro has weakened steadily as Europe’s economic crisis has worsened. In May 2011, the euro was trading at about $1.50. Late Friday in New York, it was at $1.26, near a two-year low. But the big money says the euro will weaken even more. Traders have wagered more than $30 billion against it, according to data from the federal Commodity Futures Trading Commission. That figure, which represents so-called short sales, is close to a record high.

“This short position is unprecedented in terms of size,” said Robert Sinche, global head of currency strategy at RBS Securities in Stamford, Conn. “There are a lot of people with some very negative scenarios out there, and they’ve all acted.”

It’s worth remembering that the euro has been weaker than this before — a lot weaker. After euro notes and coins went into circulation on Jan. 1, 2002, the currency promptly sank to about 86 cents. By 2008, however, it had rebounded as high as $1.60.

As forecasts go, Mr. Krygier’s isn’t nearly as bleak as some. He doesn’t expect a wholesale breakup of the euro zone, which has gone from being a far-fetched idea two years ago to a much-talked-about fear today. He says he thinks that Europe will ultimately get its act together and save the euro.

“The question,” he says, “is how long it will take and how much pain there is before we get there.”

If the left-wing parties win in Greece and back away from austerity, prompting a default or a disorderly exit from the euro, “we would expect the euro to drop like a stone,” he says. “The consequences would be dramatic.” The currency could sink to parity with the dollar, he says.

Mr. Krygier has been negative on the euro for more than two years, but his sentiment darkened this spring, as the focus of the fears moved from Greece to bigger countries.

“The big turning point was the transition from a crisis involving Greece and the smaller countries to a crisis that could engulf Italy and Spain,” he says. “It became much more existential for the euro zone itself. We clearly saw at that stage that the vulnerability had increased further.”

Mr. Krygier also expects the euro to decline against the British pound and Scandinavian currencies. And for all the recent doubts about the strength of the economic recovery in the United States, the dollar remains the pre-eminent refuge for foreign investors.

“The U.S. economy is still seen as a safe haven because of the depth of its financial markets, and it’s also sufficiently removed from the epicenter in Europe,” he says.

To be sure, Mr. Krygier says, a victory by those who stand behind austerity could produce a quick snapback in the euro’s value against the dollar. But even if that happened, it probably wouldn’t last, he says. “You might see a short-lived recovery, but in the medium term, the euro has to be weaker.”

And so Mr. Krygier, like just about everyone else in the financial world, will be waiting things out on Sunday. First, he plans to watch the European soccer championships. (Germany, which has prescribed austerity to save the euro, is playing Denmark, which opted out of the common currency and still uses the krone.) Then he will stay up as the first election results come in.

Whatever happens in Athens, doubts about Spain and Italy will only continue to grow, Mr. Krygier predicts. Those nations’ debt loads are large, and both are increasingly seen as unable to make the kind of changes that will persuade investors to keep buying their debt.

THE ultimate answer, Mr. Krygier says, is for European governments, led by his native Germany, to agree “on concrete and credible steps toward greater fiscal and political integration,” including the issuance of broader euro zone debt. That would eventually allow Spain and Italy to borrow what they need with Continentwide backing. In addition, he says, leaders should come up with a euro zonewide bank guarantee to avert full-scale bank runs in shaky countries.

Ultimately, Mr. Krygier says, the market will force policy makers’ hands. “But with 17 parties sitting at the table, the decisions are glacial,” he says. “The markets move in a rapid-fire fashion. The stakes are increasing.”

U.S. Stocks Rise Amid Speculation on Stimulus

U.S. stocks rose, giving the Standard & Poor’s 500 Index its first back-to-back weekly rally since April, on speculation central banks will act to boost the economy as investors awaited Greek elections this weekend.

Microsoft Corp. (MSFT) gained 2.3 percent as a person familiar with the matter said the company will announce plans next week to sell a tablet computer running the next version of Windows. IntercontinentalExchange Inc. added 4.7 percent as its bid for the London Metal Exchange was rejected in favor of Hong Kong Exchanges & Clearing Ltd.’s offer. Facebook Inc. (FB)  jumped 6.1 percent and capped the first weekly gain since it went public.

The S&P 500 rose 1 percent to 1,342.84 at 4 p.m. New York time, the highest since May 11. The Dow Jones Industrial Average climbed 115.26 points, or 0.9 percent, to 12,767.17. Trading volume for exchange-listed stocks in the U.S. was about 7.5 billion shares, 11 percent above the three-month average.

“Ahead of Sunday’s election in Greece, central bankers stand ready,” Peter Boockvar, equity strategist at Miller Tabak & Co. in New York, wrote today. “With all the water central banks have expended out of their fire hoses in their attempt to ‘do something,’ I can only think of magic candles. Those candles you blow out that only flare up again immediately after.”

Expectations for global policy action grew as central banks intensified warnings that Europe’s failure to tame its crisis threatens the economy. European Central Bank policy makers have overcome a key concern about taking the benchmark rate below 1 percent, two euro-area central bank officials said. The June 17 vote will turn on whether Greeks accept open-ended austerity to stay in the euro or reject the conditions of a bailout and risk becoming the first to exit the 17-member currency.

Fed Action

Stocks also rose on speculation the Federal Reserve may join central banks in taking steps to boost growth. Data today showed that industrial production unexpectedly fell and consumer confidence slid, adding to evidence of U.S. economic weakness. U.S. policy makers meet June 19-20.

“There’s hope of some coordinated action if bad news does occur,” said Tim Ghriskey, who oversees about $2 billion as chief investment officer of Solaris Group in Bedford Hills, New York. He spoke in a telephone interview. “There’s the Greek election. It could be an ongoing process.”

David Bianco, Deutsche Bank AG’s chief U.S. equity strategist, withdrew a forecast that the S&P 500 (SPX) will post a near-term gain of 5 percent or more, citing uncertainty before Greece’s elections. While Bianco maintained his year-end projection of 1,475 for the index, he said he’s no longer convinced the next 5 percent move in the gauge is higher.

Least-Tied

Concern about Europe’s debt crisis and a global slowdown put the S&P 500 on the brink of a so-called correction this month. It fell 9.9 percent from an almost four-year high in April through June 1. Since then, the lowest valuation in six months and bets on policy action drove the gauge up 5.1 percent. The S&P 500 rose 1.3 percent this week.

All 10 groups in the S&P 500 rose today as energy and technology shares had the biggest rallies. Chevron Corp. (CVX), the second-largest U.S. energy company, added 2.4 percent to $104.33. Oracle Corp. (ORCL), the biggest maker of database software, added 2.9 percent to $27.70 after ThinkEquity LLC recommended buying the shares.

Microsoft jumped 2.3 percent to $30.02. The company may demonstrate the tablet computer at an event scheduled in Los Angeles on June 18, said a person familiar with the plans. The company has said it aims to release the new Windows 8 operating system in time for the holiday season. Frank Shaw, a spokesman for Microsoft, declined to comment.

Bidding Process

IntercontinentalExchange, the second-largest U.S. futures market, rallied 4.7 percent to $134.80. ICE (ICE) and Hong Kong Exchanges were the two parties left in a bidding process announced by the LME in September. The LME said today it would no longer be seeking competing takeover offers.

Facebook rose 6.1 percent to $30.01, extending its weekly advance to 11 percent. The company asked a court to consolidate more than 40 shareholder lawsuits over its initial public offering last month. Investors sued Facebook and Nasdaq OMX Group Inc. over problems in trading company shares on May 18, the first day they were publicly available.

Navistar International Corp. (NAV) soared 7.6 percent to $29.95. MHR Fund Management LLC disclosed a 13.6 percent stake in the truckmaker, more than billionaire investor Carl Icahn’s 11.9 percent holding. MHR is run by Mark Rachesky, a former protege of Icahn’s. MHR “may seek to engage in discussions with management,” according to a regulatory filing.

Financial Shares

Financial shares in the S&P 500 advanced 1.4 percent.Bank of America Corp. (BAC) (BAC) added 3.1 percent to $7.90, after slumping as much as 1.4 percent earlier today.

David Trone, an analyst at JMP Securities LLC, expects some of the largest financial institutions to underperform as recent developments in Europe increase concern the region will experience “significant” damage.

SAIC Inc. (SAI) (SAI) jumped 5.1 percent to $12.24. The defense contractor specializing in computer services was raised to overweight from neutral at JPMorgan Chase & Co.

The Bloomberg U.S. Airlines Index (BUSAIRL) of 10 stocks slumped 2.2 percent. AMR Corp. Chief Executive Officer Tom Horton asked an ad hoc bondholder group to study his plan for a stand-alone American Airlines before reviewing a possible merger for the bankrupt carrier, two people familiar with the matter said. Horton expressed frustration with attention being given to a pending US Airways Group Inc. (LCC) (LCC) merger bid, the people said.

US Airways

US Airways tumbled 3.6 percent to $12.03. Southwest Airlines Co. (LUV) (LUV) dropped 2.9 percent to $8.93.

Any multiyear rally in U.S. stocks may depend on a signal that the bond market has yet to send, according to Michael Hartnett, Bank of America’s chief global equity strategist.

Bond yields have to reach “an inflection point” before shares can move into what’s known as a secular bull market if history is any guide, Hartnett wrote this week.

Hartnett highlighted three inflection points in the past century that foreshadowed stock-market booms during the 1920s, after World War II, and throughout most of the 1980s and 1990s.

A comparable surge in share prices is unlikely, he wrote, “until Treasury yields rise in response to stronger growth and a healthier global economy.” The 10-year yield fell to a record 1.4387 percent this month.

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net