It seems almost surreal but the US equity markets seem to be keying of the Greek debt market. Or perhaps the wider European debt markets and I’m just using the Greek bonds as a proxy. Whatever the case, for some time now, this tell has been giving uncanny signals a few days to a few weeks in advance.
Whenever we see Greek bond prices fall (and yields rise) the US equity market shortly afterward does the same. I’ve been watching this since spring and although I’m not sure how exactly to explain it, the correlation is clear.
The most recent move in Greek government bonds is due to the admitted budgetary shortfall that will not allow them to meet the EU’s provision that their deficit be 15% (or less) of their GDP. This was a target that Prime Minister Papandreou claimed would be met just a few weeks ago.
In a shocking bout of honesty, the Finance Minister Papaconstantinou said, “We are pretending collectively as a country to have a tax system. We don’t.” The large fixed income manager PIMCO is so pessimistic about their prospects that they believe Greece will default within the next three years.
As a result the 10 year bond yield is now 10.41% and the Greek 2 year bond (chart not shown) has reached a yield of 8.71%. The last time Greek bonds fell was in August; the S&P 500 index responded by falling in sympathy. Then in early September they rallied and stock prices rallied with them.
This isn’t the only flashing red light on our panel. The AAII US retail investors mood took a decidedly giddy turn this week as the bullish camp rose above 51% for the first time since May 2008. It is very unusual to see the majority of the survey respondents believe that stock prices will be higher in 6 months’ time. Historically this has been a very poor time to be long stocks. More in tomorrow’s sentiment overview, including all the other sentiment surveys and indicators.
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