Market Perspective for February 9, 2015

Stocks look to continue their rally after the major indexes erased nearly all of their losses from January. Last week saw the release of strong economic data, including January job and wage growth that came in well above expectations.

This week, Greece is likely to dominate the headlines and possibly the markets as well, at least as long as it plays hardball in negotiations. The country has until next Monday to ask for an extension of the bailout, but thus far Greece has refused. Without the bailout, Greece would quickly be unable to fund itself in euros. The natural reaction of Greek citizens will be to pull their euros out of Greek banks before the country changes their euros into new drachmas. Greece’s leaders say they want to stay in the eurozone though, and popular opinion agrees with them, creating a dilemma. Greece cannot both stay in the euro and reject the bailout requirements.

Depending on the outcome of this issue, markets could face two very different scenarios. The euro is currently around $1.13, in part due to the political changes in Greece that have made a disaster scenario for the euro more likely. A Greek about face could send the euro back towards $1.20 and higher as the crisis fades. Should Greece exit the eurozone, Morgan Stanley thinks the euro could fall as low as $0.90, a 20 percent drop that would rock global financial markets.

Were it not for Greece, the U.S. markets would be marching higher thanks to the strong economy and rising earnings. FactSet Research reports that 323 of the S&P 500 companies have reported and 78 percent have beaten earnings estimates. Earnings growth is 3.0 percent so far, above the 1.7 percent growth forecast at the start of earnings season.

We’re past the heart of earnings season, but some major companies still haven’t reported. Among those reporting this week are Cisco (CSCO), Time Warner (TWX), Tesla (TSLA) and Mondelez (MDLZ).

Economic data will be light this week, with January retail sales being the most noteworthy. Wholesale and business inventories from December could impact the next estimate of 2014 fourth quarter GDP growth and 2015 first quarter GDP estimates if they deviate from expectations.

Chinese trade data out over the weekend show the Chinese economy may be slowing more than anticipated. Total imports were expected to fall thanks to plunging commodity prices, but China imported fewer raw materials such as crude oil and copper versus a year ago. Later this week, the country will report inflation data for January. As always, Chinese data has a significant impact on commodity prices. In early trading, commodities markets didn’t seem perturbed by the weak Chinese data, with oil trading near its highs from last week and copper holding steady.

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