Will Greece Recover?
The market tanked on Friday and it appears ready to tank again on Monday. Volume was high as SPX shrank nearly 3% and the bulls lost 1175 support. The declines were everywhere, but financials once again fell the most.
Financials are down 18% in the last three months and 25% in the last six. Big banks have taken the brunt of selling this year and for good reason. Economic conditions have weakened and European nations could still leave the euro zone or declare bankruptcy.
Greece is the obvious example of a problem nation. It's already had a few bailouts over the years, and it will need another round of bailout money to keep the lights on next month. In the past, Greece was able to obtain money without too much trouble, but political turmoil between Germany and other euro zone countries has increased this year. And since Germany usually pays the bills, this shift in stance has wrecked havoc on the bond market, and now the equity market, especially in Europe.
The market is beginning to price in a Greek collapse. Greece, on its own, is not that big of a deal, and their impact on the global economy is small. But they are part of the euro zone and numerous banks have exposure to Greece.
If the euro zone lets Greece fail, then the door is open for Spain, Portugal or Italy to also fail. The whole purpose of the euro zone was to build stability. And if that union falls apart so will many of these countries recovery hopes.
And if countries in the euro zone begin to default, banks with exposure to them will wilt. In the near term, investor focus is on Greece, and the big question is will it receive more aide. But the near term story is actually part of the long term saga of the euro.
Many investors never believed the euro would succeed, I am one of them. But the euro has survived over the past few years, and appreciated against the dollar. Although a large portion of that strength had nothing to do with economic growth.
Most countries in Europe have weak economies. But those weak nations were always given help by the stronger nations when they needed it. That cooperation is a big factor for why the euro is strong today. But if Greece is left to fail, which looks possible, investors will question who's next?
Many banks were thought to be safe in the U.S. and then Lehman failed. Once that happened investors did not know who would fail next, and over a six month period the market was in complete disarray. We see that same fear in Europe. And that fear has also spread to banks with loan exposure to weak European countries.
The indices in Asia and Europe were slammed today. Asian indices were down around 2% and the European indices are down 4%. The selling from overseas is likely to drag the U.S. indices down this morning and SPX should hit 1131 support.
If 1131 cannot provide support 1115 is the next stop. I find it hard to believe that 1115 will break this week. SPX has already fallen 4% since Thursday, and a move to 1115 would be a 7.5% decline - it would be unusual to have a major index fall more than 7.5% in such a short time. Then again, the indices have made a habit of pulling off weekly 10% moves over the past few months.
