EmailAll in all, it was a pretty good holiday weekend for market participants. EU finance ministers finally gave the OK to the second bailout package for Greece and the People's Bank of China announced banks' required reserve ratio will be cut 50 basis points to 20.5%.
While the U.S. feted its presidents, global equity markets fared well on Monday in anticipation of the Greek deal and in response to the monetary policy move by China. Today, they have shown more reserve.
Most European bourses are trading lower while Asian markets were mixed.
The U.S. for its part is indicated to open modestly higher, even after Wal-Mart (WMT) failed to impress with its quarterly earnings report.
An impressive earnings report from fellow Dow component Home Depot (HD) has acted as an offsetting factor along with the headline relief over the Greek deal.
The latter reportedly came together after private sector creditors agreed to take an even bigger haircut on their debt holdings and after it was agreed the ECB would forego profits on its Greek bonds, earmarking them instead for national central banks that will distribute them to their governments to help with the costs of Greek debt relief.
The response to these developments is not as robust as some might think. That suggests the news had largely been priced into the market already.
Rumors that China would do more to promote a soft landing have been in the market for a while. The timing of its move to cut the required reserve ratio may have been a surprise, yet the act itself was not.
Over the last four days then, we have seen Congress approve an extension of the payroll tax cut and emergency unemployment benefits through the end of the year; China forge ahead with an easier monetary policy; and an agreement on a second bailout package for Greece.
While each development has drawn its share of criticism, the bottom line for the equity market is that it is all good in terms of lowering the level of uncertainty and fear that plagued the market in 2011. The fundamental translation is that these developments have reduced some of the subjective fears embedded in the high equity risk premium and have cracked the door on the objective view that there is good relative value in the U.S. equity market.
The natural tendency, of course, is to consider the question of what comes next. Nobody knows the definitive answer, but plenty of subjective fears are building again around Iran, Syria, and rising oil prices.
Crude futures have topped $105 per barrel in the wake of weekend reports that Iran has stopped oil shipments to the UK and France and amid growing concern that civil unrest in Syria could erupt into a regional conflict.
These are legitimate concerns, yet the salient message today is that the worst-case scenarios of 2011 are looking less worse in the early part of 2012.
--Patrick J. O'Hare, Briefing.com
Patrick J. O'Hare is Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial, please email researchsales@briefing.com.
