Market Perspective for May 18, 2015

The S&P 500 Index and Dow Jones Industrial Average set new all-time highs last week and over the coming days, the Nasdaq could join them. From Friday’s close, the Nasdaq needs a gain of less than 1 percent to hit a new all-time high. The Russell 2000 Index needs a gain of more than 2.5 percent to exceed the record it set in April.

Housing starts and building permits for April are out this week, along with April existing home sales, which are both leading indicators and inflation. Aside from weekly jobless claims, the flash PMI and Philly Fed report for May will be out.

Earnings season is almost over, with attention now shifting to the retail sector. Major companies reporting this week are Target (TGT), Home Depot (HD), Lowe’s (LOW) and Wal-Mart (WMT).

Economic data will be overshadowed by Wednesday release of the minutes of the last Federal Open Markets Committee meeting. Investors will focus on the timing of rate hikes. Recent weakness in some economic data has investors shifting their rate hike expectations out to late 2015 or even early 2016.

Long-term treasury interest rates peaked early last week and are currently sitting at or above their 200-day moving average. Based on the short-term momentum, a further decline is likely this week, which would be good for the rate sensitive utility, real estate and homebuilder sectors. Financials benefit from rising rates, so a decline will be a headwind for this sector.

Greece remains a center of attention and this attention is likely to increase over the next three weeks if there’s no debt deal. Greece made a payment to the IMF this month by using its SDR balance at the IMF, which must be replenished. The government is now scrambling to find cash for salaries and pensions of government workers. Payment tricks and not knowing how you will make your next payment is generally the end game for debtors, and another payment to the IMF is due on June 5.

Greece’s strategy has been high stakes bargaining, playing chicken with the Troika in the hopes that the Europeans want to avoid a default more than Greece. However, Greece’s people, reflected by the ruling Syriza party, are unwilling to bite the bullet. They want government jobs protected, not cut, and they also want to stay in the eurozone. This gives European creditors the upper hand because Greece cannot stay in the eurozone without agreeing to whatever the creditors want, and it cannot protect those jobs without leaving the Eurozone and printing its own currency.

The current thinking is that Greece will be given an offer it cannot refuse, similar to what happened to Cyprus. Greece will fold, more aid will be given, default will be avoided and the crisis will be delayed again. The euro/dollar exchange rate reflects this optimism. At $1.13 in Monday trading, the euro is closer to a key resistant level at $1.20 than it is to its low below $1.05. The euro exchange rate is the key asset to watch for forecasting the situation in Greece. There are no insider trading rules in currency markets because there are too many factors that affect their values. If a default appears likely, traders will be tipped off and the euro will tumble. If a deal looks likely, the euro will move sharply higher.

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