Greece tension stays center stage

By Jeremy Gaunt, European Investment Correspondent

LONDON (BestGrowthStock) – One big question faces investors in the coming week: Will Greece’s formal request to the European Union and International Monetary Fund for help with its debt burden calm fears of a default?

The issue is bound to dominate markets over the next week even with plenty of other events ahead, including a Federal Reserve meeting and yet more U.S. and European earnings reports to come in.

“If it doesn’t work, Greece is going to default. It’s as easy as that,” said Andrew Bosomworth, executive vice president of bond giant PIMCO Europe.

He added, however, that he believed turning to the EU and IMF would work for Greece, at least for now.

The clamor among investors for something to be done about Greece’s debt had reached a crescendo before Prime Minister George Papandreou announced on Friday he was asking for aid.

Not only did Greek 10-year bond yields blow out to more than 10 percent. Spreads with benchmark Bund yields widened to levels not seen since Greece was only just beginning to get down to the serious business of qualifying for the euro zone.

This was essentially making it nigh-on impossible for Greece to get the money it needed to pay debts and cut its deficit.

The crisis was also throwing out some surreal numbers.

The cost of insuring against a Ukrainian bond default became cheaper than insuring against euro zone member Greece. Russia, which defaulted 12 years ago, only had to pay 5.082 percent to investors when it sold new 10-year dollar bonds.

Equities and bond spreads recovered somewhat in the immediate aftermath of Greece’s decision while the euro remained weak. But it will only be in the coming week that a true picture emerges, including what impact it has on other peripheral euro zone economies such as Portugal.

There are numerous hurdles ahead, from actual negotiations to German elections, all of which are likely to continue putting pressure on at least the euro.

“I don’t necessarily think we’re out of the woods here because there’s a fair bit of wrangling to go,” said Sean Maloney, a rate strategist with Nomura.

“The (immediate) reaction … is understandable but whether it extends another significant amount from here is another question.”

NO SURPRISES

Tension over Greece, meanwhile, is likely to stand in stark contrast to how investors feel about another big event in the coming week — Wednesday’s meeting of Fed policymakers on interest rates.

To say nothing is likely to happen would be unreasonable given the importance of such an event. But investors are expecting it to be close to that.

The Fed is seen keeping interest rates unchanged near zero and repeating its pledge to keep them very low for an extended period of time.

A Reuters poll of primary dealers saw a 62 percent probability of the first Fed rate hike coming in the fourth quarter.

This was actually more hawkish than the view among fund managers in a Bank of America Merrill Lynch survey, which found them essentially split between the fourth quarter and the first quarter of next year.

“High unemployment will keep the Fed on hold — as long as there are no inflationary pressures building,” Sarasin economists said in a note. “The investors focus will be again on the wording regarding the timing of any policy tightening.”

Low interest rates and negligible inflation, meanwhile, have kept stock investors buoyed and generally able to extend last year’s rally.

One thing that has been helping this along is a series of surprisingly robust U.S. earnings reports.

As little as three weeks ago, analysts were expecting U.S. earnings to average a 36.6 percent year-on-year gain. Thomson Reuters’ data shows that expectations added to actual results now point to a 48.6 percent rise.

That said, MSCI’s all-country world stock index (.MIWD00000PUS: ) is down more than 2 percent from a 19-month high hit on April 15 and a number of investors remain wary of a correction.

Stock Investing

(Editing by Susan Fenton)

Greece tension stays center stage