Place your bets. Yesterday's and today's trading is all about positioning ahead of Sunday's elections in Greece and next week's Federal Reserve policy meeting.
Stocks markets are higher because traders are betting that European governments will take action after the election to prevent any adverse credit market impact from the possibility of Greece leaving the euro-zone. Traders are also betting that recent weak US economic data will provoke the Federal Reserve to further stimulus. Such actions would provide liquidity that could boost stock prices.
In essence, economic, credit, and political circumstances are so bad, that they could be good for stocks. The downside for stocks is limited because of likely supportive actions by governments and central bankers, and there is upside potential because of a decrease in risk. That, at least, is how the bets are falling right now.
There is danger for investors in buying into this theory. There is the distinct possibility of market disappointment at government action after the fact. Remember, the boost from the Spanish bank bailout was short-lived. There is also the risk that the Federal Reserve takes only tepid action or none at all. Recent comments from Fed officials have given mixed signals.
It would be a lot more comforting if economic growth was picking up around the world, rather than easing. It would be more comforting if second quarter earnings forecasts for the S&P 500 weren't so close to zero. For now, though, investors and traders have to settle for the thought that central bankers have their backs.
It is a crap shoot (a risky venture based on random events) as to how the markets set up the rest of today and how they react on Monday. The bias right now seems to be towards optimism. A better bet might be that next week is likely to be very volatile, with market risks receiving increased attention.
Founder and Chairman, Briefing.com