A Relief Rally Or Fatigued Front Running?

Equity markets have been and continue to front run a potential deal for Greece. But to say it’s ‘’cautious optimism’ belies the massive moves witnessed in equity indices yesterday. Yesterday’s 3% move in the and this morning’s additional 0.8% gain in the DAX is not what you could call cautious even when taken in context with the recent 10% correction in the German benchmark.

This ‘deal’ does not necessarily address the real issues for Greece- it’s significant debt load and the fact that the measures proposed by Greece to its creditors seem even more austere. Greek proposals include big tax hikes, of the 7.9bn euros of measures submitted, 7.3bn concerns taxation and social security contributions.

In the short term, yes this tends to remove the initial hurdle for Greece – the release of funding in order to repay the IMF on 30/6 and avoid a technical default but a hike in taxation, including an increase in VAT on food service to 23% without any quid pro quo debt restructuring is not exactly going to stoke growth or consumer confidence in Greece in the medium term.

The euro is under a little pressure this morning and has shed 0.9% against the dollar, apparently ignoring the better than expected manufacturing and services PMI from the euro region for now.

Perception is key here. Once Greece is out of the headlines, market participants can retrain their focus unto the fundamentals of the EZ. The implementation of QE and the potential upside in stocks as a result of the potentially weaker euro aided and abetted by global diverging monetary policies There is every chance we will see some profit taking upon news that a deal has been struck. But like every other time with Greece, it’s a mere case of ‘extending and pretending’ until the next time.

In early trade, the Dax has added 0.89%, the CAC 40 is up 0.65%, the FTSE has added a more circumspect 0.15%.

Will Hedden, LCG Sales Trader provides updates on the main equity movers:

Ladbrokes (LONDON:LAD) is one of the big movers in London today adding 9.91%. M&A activity in the gambling sector continues with the bookmaker having stated it is in talks with Gala Coral to combine the two firms into one London listed company. Gala Coral had a stock market listing in the works and any merger with Ladbrokes may be seen as a defensive move but the bets are on for a larger Ladbrokes to come out as a winner."

Petrofac (LONDON:PFC) is also in demand adding 5%. The oilfield services firm had a rather gloomy looking set of number this morning but the market has taken it in its stride preferring to focus on prospects. Short term issues are being overlooked for a healthy long term pipeline of projects and growth in the order book, so even with net profits being weighted to the second half of the year the stock has reacted strongly this morning, trying to close the gap created with the disappointing update to the Lagan-Tormore Project in Shetland back in late April.

Sports Direct (LONDON:SPD) is taking the top spot on the FTSE owing to a broker upgrade. The shares are up 3.06% today but have in fact gained some 20% since its late April lows.

Manufacturing PMI in the US is expected to show a slight improvement on last month’s 54.0 print. The more closely watched durable goods orders is expected to show a protracted decline of 1% in May. Many aspects of the US economy appear to be firing on all cylinders but the devil is always in the detail. Expectations for a rate hike this year are starting to soften.

We are calling the Dow higher by 14 points to 18133.

Greece: A human tragedy behind the deal

The Greek situation is turning into a human tragedy. As Greece and the EU move closer to an agreement, the optimism in the market place hides an important calamity. Behind the austerity scenes and the collection of funds, the taxation on food and medicine in a country suffering a heavy economic regression is not a viable solution. The save-the-day strategies will only slowdown Greece’s painful collapse, yet will certainly not avert it.

Killing two birds with a stone

Back to the market, the optimism reigns. The European equities step into another festive day with passionate longs in the Eurozone indices. Euro is slightly downbeat, which adds to international giants’ cheerfulness. It is killing two birds with a stone.

German BMW (MILAN:BMW) and Daimler (XETRA:DAIGn) extend gains; BMW consolidates above 100 mark, the positive momentum suggests a retracement back to 50% (109.50) on March-June sell-off. Daimler sits on the 50-dma (86.2) with investors shifting their target back to 90/91 mark.

The DAX managed to grab a seat above the 100 day moving average (11500). Given the little exposure to Greece, a potential risk of a non-deal should not build a barrier for a recovery back to 12000/500 mark. Still the best alternative to German bunds, German equities should remain popular.

In the FX market, euro holds ground versus the US dollar above the uptrend channel base building since June (1.1220). Technically, a Fibonacci’s extension from April-May hike on May correction suggests potential for a rise to 1.1700/1.1750.

Against the British pound, the option related offers trail below 0.71/0.7085p preparing the base for a drop back to 0.70p in anticipation of ECB/BoE divergence over the next 6 months.