August 14, 2022

Stocks & Bonds: U.S. and European Markets Rise on Optimism Over Greek Vote

A relief rally swept the European and American markets after an early Wednesday vote by the Greek Parliament to approve an austerity plan.

The plan was passed, a condition set by international lenders for providing more financing and preventing a default, after weeks of uncertainty in financial markets related to the debt problems in the euro zone.

Investors had been bracing for the Greek Parliament’s decision on the package, which includes unpopular wage cuts, tax increases and privatizations. While investors got some relief with the announcement that it had passed, analysts warned that unresolved fiscal issues remained.

“Today’s vote will certainly give some short-term relief to markets, but concerns about the long-term feasibility of Greece’s fiscal plans still remain in place,” said Diego Iscaro, an IHS Global Insight senior economist, in a research note after the vote.

Protests continued outside the Parliament building in Athens. A second vote was scheduled for Thursday on enabling legislation to set the timing of the privatizations, especially of Greece’s state-owned electric utility.

With so much anticipation before the vote, analysts said that by the time it took place, investors had fixed positions.

“This is classic ‘buy the rumor, sell the news,’ ” said Phil Orlando, chief equity market strategist at Federated Investors. “The equity market was up in anticipation. We priced it in ahead of time.”

Still, the news was enough to lead major indexes higher. The DAX index in Frankfurt closed up 1.7 percent at 7,294.14, while the FTSE 100 in London rose 1.5 percent to 5,855.95.

In the Asia-Pacific region on Thursday, the reaction was muted, with the Nikkei 225 flat by the midday break in Tokyo. On Wednesday, the Nikkei had risen 1.5 percent on optimism that the Greek Parliament would pass the austerity measures.

Stocks in South Korea edged up 0.3 percent on Thursday, and Singapore and Taiwan climbed 0.7 percent. In Hong Kong, the Hang Seng index was 1.7 percent higher by midmorning.

In the United States, the Dow Jones industrial average closed up 72.73 points, or 0.60 percent, at 12,261.42. The Dow has now risen every day this week, putting it up 326.84 points, or 2.74 percent, in that period.

The Standard Poor’s 500-stock index was up 10.74 points, or 0.83 percent, at 1,307.41 and the Nasdaq composite index was up 11.18 points, or 0.41 percent, at 2,740.49.

The Treasury’s 10-year note fell 24/32, to 100 1/32. The yield rose to 3.12 percent, from 3.03 percent late Tuesday.

Bank stocks helped lift the Dow, and Bank of America was the most actively traded in the broader markets’ financial sector, which rose more than 2 percent. Bank of America, which said it would set aside $14 billion to pay investors who bought securities it assembled from mortgages that later soured, rose nearly 3 percent to $11.14. The company said it expected the agreement to lead to a second-quarter loss of $8.6 billion to $9.1 billion.

Citigroup was up more than 3 percent at $41.50. Morgan Stanley rose 4.75 percent to $23.39.

Other sectors that forged ahead were materials and energy, which each closed more than 1 percent higher. Oil closed up $1.88 at $94.77.

Yields on benchmark 10-year Spanish, Portuguese and Greek bonds declined, while those in safer equivalents issued by Germany and France rose, indicating investors were willing to switch back into riskier securities.

 The euro ended the day at $1.4431, up slightly from $1.4370 Tuesday.

The agreement by Greek lawmakers on the austerity measures was a crucial step in the international rescue of the crippled economy, and the relatively muted market reaction to the vote showed that investors knew that the country’s financial troubles were far from over.

“What’s really important is not the vote itself,” said George Magnus, senior economic adviser at UBS in London, “but the implementation of what they’re voting on, and that’s where the programs will come unstuck.”

The vote was critical to unlocking near-term financing, specifically the disbursement of the fifth installment of the original 110 billion euro bailout for Athens (roughly $140 billion when agreed to last year).

That installment would be worth 12 billion euros and would enable Greece to meet obligations like bond coupon payments in July, while paving the way for a new international lending program to provide financing through 2014.

Euro area ministers are expected to provide details of the program on July 3.

In a research report released Tuesday, Citigroup analysts said: “Despite the aid package, eventual Greek haircuts may be inevitable, with estimated private sector haircuts of 65 to 77 percent,” referring to the write-downs that bond holders will be required to accept.

“In other words, a bailout package addresses the liquidity issue much more than the solvency issue,” Citigroup said.

Two Commerzbank analysts, Benjamin Schröder and Peggy Jäger, said early Wednesday that “even if the bills are passed, worries could still linger on for longer, if no broader consensus across Greek political parties forms.”

Bettina Wassener contributed reporting from Hong Kong.

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