Signs of market optimism

US stocks rose yesterday, Asian markets follow today and the euro has strengthened over the past 24

(21.06.2011) US stocks rose yesterday, Asian markets follow today and the euro has strengthened over the past 24 hours. But the Greek situation does not seem to be the reason behind the development, and it is uncertain whether the improvement in market sentiment will continue.

By Kyrre Aamdal, Senior Economist at DNB Markets

Despite of continuing worries regarding Greece, the US stock markets rose yesterday. The S&P500 index was up by 0.5 per cent. At the same the VIX index, which is measure of the volatility in the stock markets declined yesterday. The amount of put options relative to call options also fell, which indicate that investors are not as eager as they have been to protect themselves towards a further decline in the markets.

However the volume traded was very low, indicating that fear still is present. In the US Treasury market prices have been relatively flat over the past 24 hours. The euro has strengthened by 0.8 per cent versus the dollar. It is hard to say that recent developments regarding the Greek situation can justify such a strengthening, but it can be a result of somewhat higher risk appetite. This may again be a result of the IMF's review of the European economy and the following public announcements. Norwegian kroner have weakened slightly versus the euro since yesterday morning.
 
IMF yesterday released their assessment of the European economy. For the first time the IMF sees the upturn as broadly sound. The debt crisis among peripheral countries is, however, seen as a risk. The situation calls for persistent efforts and supervision to prevent problems for the core countries and to prevent the problems from spilling over to the rest of the world. Furthermore the IMF says that regardless of the crisis in the periphery, the ongoing efforts to secure a dynamic and resilient monetary union remain relevant and should be further strengthened. IMF also wants the euro area to work out a more integrated financial stability framework.
 
On July 15th a part of the Greek debt matures and the country needs the next tranche of aid from the rescue package agreed on last year to meet its commitments. There are however two conditions that hinders such a payment. Firstly Greece's austerity measures have not worked out as planned and further fiscal tightening is called for. Secondly, Greece has not managed to obtain funding in the markets in 2012, as was assumed in the bail out agreement. With the existing rescue deal Greece has secured it's financed until March 2012, but no longer. IMF can only pay out money to countries which has secured its finances over the next year. IMF will, thus, not pay out its part of the next tranche to Greece until EU has come to an agreement on a new bail out for the country so that Greece remains solvent for a longer period, even without financing from the markets. The EU has decided that an agreement on a new Greek emergency loan will be postponed until mid-July.
 
EU has also postponed the payment of the next trance of the existing bail out package to give Greek authorities time to negotiate a new set of austerity measures. Today the Greek Prime Minister and his cabinet face a confidence vote. If the government is approved, the new finance minister will strive to get the reworked austerity programme approved, possibly by June 28th. The EU countries have also agreed to try to get private investors to participate in a new rescue deal, but has underlined that any such participation have to be voluntarily. It is however still unclear how EU are going to get private investors to take part in the Greek rescue. The rating agency Fitch yesterday said they would consider even a voluntarily Greek rollover of Greek debt as a default and probably cut Greece's credit rating as a response.
 
Today figures for US existing home sales are released. Consensus only expects an outcome of 4.8 million units, down from 5.05 million units in April. (Annualized figures) Such an outcome would be the lowest since November last year. The reason behind the low expectations is a sharp decline in pending home sales from April. Pending home sales normally leads existing sales by about a month and a half.