Market Perspective for July 3, 2015

The S&P 500 Index fell 1.2 percent on the week, a reasonably good result considering it dropped 2.1 percent on Monday when Greece announced it would default to the IMF. Market leading small-caps were hit harder, sliding 2.4 percent, while the Nasdaq was off 1.4 percent. The Dow Jones Industrial Average slid 1.2 percent. The Dow Transports continued to move lower over the past week as the Department of Justice added to the index’s woes by announcing an investigation into airline pricing.

Investors were remarkably sanguine about the situation in Greece. The emerging consensus appears to be that the European Central Bank will print whatever money is necessary to solve the problem. This is why news of Greece’s default sent the euro higher and rumors of an agreement sent it lower. A referendum on Sunday will give the Greek voters a say in the next step. Greece can appeal for more bailout money and a new deal or reject the creditors’ offers and face the prospect of a full-fledged default.

Greece’s banking system is also presenting complications.  Greek citizens have been draining their accounts and the banks were mostly closed this week to prevent a total collapse. If Greece doesn’t receive any more bailout aid, depositors in the banks could lose everything beyond insured amounts. As was done in Cyprus, a bail-in would turn deposits into equity shares of a newly reconstituted bank. Additionally, the Greek government may choose to nationalize the banks.

A new bailout for Greece would be good news for financial markets, but it probably would not solve Greece’s debt problems, setting us up for yet another round of negotiations. The IMF said Greece needs 60 billion euros over the next three years, but also said that Greece needs debt relief because it cannot pay back its existing debt. How the Greece situation is dealt with will have major implications for countries such as Spain, Italy, Portugal and Ireland. If Greece gets a good deal, these nations will soon be asking for the same treatment.

Aetna (AET) announced it will buy Humana (HUM) on Friday. This is the first deal since the Supreme Court ruled that federal subsidies may be received by residents of states that haven’t set up exchanges. More deals are likely imminentas insurers consider the implications of the ruling and their ability to profit in these states.

In China, the stock market continued to push to new lows. All the major indexes are now in technical bear market territory, having fallen more than 20 percent. The Shanghai Composite is down 28 percent from its high on June 12, while the ChiNext index is off 35 percent from its June 3 high. The government has launched a series of measures aimed at boosting the market, from easing margin rules, cutting trading costs, lowering interest rates and launching investigations of short sellers. Thus far, all of these efforts have failed.

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