They're Back: Eurozone Fears Reemerge


Don’t look now, but Wall Street’s nagging eurozone headache is back.

After six weeks of uncharacteristic calm and soaring stock prices, eurozone jitters re-emerged on Friday, sparking a rare triple-digit selloff on the Dow and setting off a spike in volatility

The culprit? Greece, which has incredibly been a thorn in the global market’s side for almost two years now.

“Investors quit thinking about Europe. It was a risk-on environment again for eight weeks, but now we’re kind of at a standstill,” said Stuart Freeman, chief equity strategist at Wells Fargo Advisors. “A lot of investors think this market may have moved a little ahead of itself.”

Investors’ risk appetite was stunted by the news overnight that the latest bailout of Greece may not be in the bag after all.

Reports that political turmoil in Athens could collapse a $172 billion rescue from the International Monetary Fund and European Union helped send the blue chips sinking as much as 145 points on Friday -- the largest intraday decline since January 13. If the benchmark index closes with a triple-digit loss, it would be its first for all of 2012, which started very strong thanks to bullish economic data and easing tensions in Europe.

So far this year, the largest one-day decline at the close has been just 74.2 points, which happened on January 27. Remarkably, prior to Friday, 20 of the 27 trading days this year saw the S&P 500 move less than 0.5% in either direction, according to Dan Greenhaus, chief global strategist at BTIG.

In a further sign of the rising concern, the VIX, which helps gauge market fear, soared as much as 11% Friday morning. While this measure remains at subdued levels compared with last year, Friday’s outburst still marks its biggest one-day increase in three months.

Likewise, the cost to insure the sovereign debt of a number of embattled eurozone countries climbed on Friday.

According to Markit, the cost to insure $10 million of Italian bonds jumped 7.1% to $392,000, while the cost to insure Spanish debt climbed 5.2% to $364,000.

The fear is that if Greece’s political parties fail to reach a deal on highly unpopular austerity measures, the IMF won’t release the latest tranche of bailout funds, triggering a disorderly default on March 20.

“While the Greek situation has…been pushed down the importance scale, that is only because a deal to secure the second bailout looked more likely than not,” Greenhaus wrote in a note.

He added, “While the U.S. economy is clearing picking up steam… a sudden default in Europe would once again raise the prospect of a regional breakup. What effect this would have on sentiment, prices, financial conditions and thus economic output is anyone’s guess.”

So does the return of Greece to the forefront signal the markets are poised to enter a new risk-off period?

“I think it’s possible. We’ve been through two and half months of risk-on,” said Freeman, who has a year-end target of 1325 to 1375 for the S&P 500.

The ironic thing is that while investor sentiment about Europe improved over the past few months, the fundamental issues crippling the region didn’t exactly go away.

Thanks to some innovative moves by the European Central Bank, fears about a banking crisis certainly receded, sending yields tumbling and credit default swaps to narrow.

However, Greece, Italy, Spain, Portugal and other countries are still saddled with billions of dollars of debt that is bloating their balance sheets. The politicians in Europe are still having serious trouble agreeing on how to fix these structural ills.

“The key is still that you still have countries that have balance sheets that are an issue. You still have banks over there that appear to have credit levels that are not sufficient. Those problems didn’t go away between December and February,” said Freeman.