So why did stocks finally hit the skid, with their worst performance since sometime in November?
No clear answers, though Mike O’Rourke at BTIG conjures up a guess:
The reasons for today’s profit taking range from earnings misses to uncertainty about headlines from Europe. The market was noticeably disappointed by the earnings from the Financial sector, which lost 2.2% today. Additionally, confusion about headlines relating to Greece emanating from Germany provided further inspiration for investors to take a step back. Lars Feld, who was nominated to Angela Merkel’s Council of Independent Economic Advisors last week, created a stir today telling the German media that Germany should prepare for a Greek default. Those headlines followed overnight reports that Germany was seeking to restructure Greek debt.
The theoretical plan (which was denied) was that Greece would be allowed to use EFSF funds to repurchase outstanding debt at market prices, which is obviously a discount to face value and would retire the debt thereby reducing the amount outstanding. Whether true or not, European Central Bankers are starting to exhibit signs of creativity in tackling the sovereign debt problem. Moody’s awarded a AAA rating to the first issue of the EFSF which is about to be floated.
We expect the market’s acceptance of these bonds to be analogous to that of GSE Agency paper here in the United States. Although all of the legal disclaimers in the world are included to prevent explicit guarantees, when a government is actively marketing and selling the paper to other sovereigns, it is expected to stand behind them. If our expectation is correct, such acceptance and thinking would provide a wide range of options for the EU to get more creative in tackling this problem.
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