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Wednesday: Euro Debt in Focus as Wall Street Prepares to be Snowed In

Tuesday, 9 Feb 2010 | 9:41 PM ET

Markets will stay fixated Wednesday on Europe's efforts to solve the credit problems of its weakest members.

Wall Street
Wall Street

Reports that Germany and other EU members were considering stepping in to help Greece deal with its staggering debt burden helped propel stocks Tuesday, after Monday's slump. The Dow sprang back, with a 150 point gain to 10,058, while the S&P 500 rose 13 to 1070.

Treasurys sold off, driving yields higher. The 10-year was at 3.639 percent and the 2-year was at 0.827 percent.

The rally in risk assets began with news that European Central Bank President Jean-Claude Trichet changed plans so that he could attend the European Union summit Thursday. It later was reported Trichet was previously expected to attend the meeting, but nonetheless, speculation circulated that the EU now planned to help Greece, which is struggling with implementing an austerity plan.

Investors have been worried that Greece's issues are too great for the country to resolve on its own, and that it is at risk of defaulting on its sovereign debt. The same concerns have more recently surrounded Portugal and Spain.

The euro rose and stocks continued to trade higher even as conflicting reports crossed wires during the trading day. The Wall Street Journal reported, however, in the mid afternoon that Germany was considering a plan with European Union partners to help Greece and other troubled European countries with loan guarantees.

"People like clarity," said one stock trader. "I wouldn't mind being long into that (EU) meeting."

But Brown Brothers chief currency strategist Marc Chandler, however, thinks the meeting may not turn out the way the markets expect. "Do they or do they not come up with a package? I say it's unlikely they will," he said.

He said the recent sell off in stocks explains in part why the market shot higher Tuesday in an exaggerated way. "People were itching to buy a dip as of Tuesday last week," he said.

Chandler said he doesn't think sentiment behind the selling in the euro, commodities and stocks really changed. "If the EU bailed out Greece, why is that good for stocks?" he said.

What Else to Watch

Traders look set to be long on snow Wednesday, as a major storm sweeps up the East Coast, threatening as much as a foot or more for Washington and New York. Washington government offices are closed for a third day, as the city continues to recover from its last major storm. Trading could be lighter on Wall Street. New York City was expected to feel the brunt of the storm in the afternoon.

Wednesday's markets will get a good look at how the Fed's exit strategy might work as it eventually ends its zero rate policy and winds down the programs it undertook to battle the financial crisis. Fed Chairman Ben Bernanke was scheduled to speak before Congress, but the hearing was postponed due to weather. His comments, however, will be made available at 10 a.m.

International trade data is expected at 8:30 , and the Treasury auctions $25 billion in 10-years at 1 p.m.

Earnings reports are expected from Arcelor Mittal, Sanofi-Aventis, Marsh and McLennan, Companhia Vale do Rio Doce, New York Times, Sprint Nextel and Computer Sciences.

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Debt Threat

Robert Browne, chief investment officer with Northern Trust, said in a quick interview that he has been a believer in the reflation trade and remains a buyer of commodities, emerging markets and high-yield securities.

He calls himself "nervously sanguine," and he's overweight "risk." Browne said investors should not underestimate the importance to markets of the low rate policies of the Fed, ECB and Bank of Japan.

He's watching Greece though, a story that's been known to markets long before they began to react.. "Greece worries us, not on a stand alone basis...It's symptomatic of when markets finally get nervous about uncontrollable fiscal deficits," he said. The U.S. is headed toward that in about seven to eight years time, he said. The question for investors is when do markets start to react.

While Greek bond spreads tightened sharply Tuesday on the news of the country's possible rescue, it was interesting to see that California bonds did not have the same response. Raymond James managing director Peter Delahunt said the spreads on California debt moved wider recently on the Greek story and were held at wider levels through midday Tuesday. He said investors are concerned that if sovereign debt could potentially be modified or restructured in a rescue plan than state issues might be as well.

The World's Banker

Goldman Sachs was the talk of markets Tuesday as traders passed around a Der Spiegel story on how it aided Greece expand its ability to borrow by an additional $1 billion, through a complicated currency swap in 2002. The swap, or actually loan, would not have shown up in Greece's debt statistics, according to reports.

A Goldman spokesman said the firm was approached by Greece to perform what was a legitimate trade. The story was of particular interest since it followed speculation in markets that Greece had hidden off balance sheet debt.

Goldman says the type of deal wasn't uncommon and pointed to a similar deal J.P. Morgan did for Italy in the late 1990s. But the story gathered momentum Tuesday even though it was apparently reported in trade publications year's earlier.

Questions? Comments? Email us at marketinsider@cnbc.com

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  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

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