What Next for Stocks?

We could be entering the first really choppy period of the new year for investors as we watch for some kind of resolution with Greece.

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Nearly everyone I speak with has always assumed that when push comes to shove Greece will get the minimum amount it needs to stave off a disorderly default.

Not because it's solvent but simply because Europe is not yet confident enough to cut it adrift.

It's deemed cheaper to keep giving it the money rather than risk the unknown financial consequences of a feedback loop into a still fragile euro zone banking system.

But the posturing, horse trading and lack of trust will bring this down to the wire. A some point someone's bluff will be called.

As a result equities start this week after the biggest weekly decline of 2012 and a spike in the volatility index the VIX, above 20 for the first time in nearly a month.

Still, it comes after a good run.

The Dow is up 20 percent since October 3, the S&P up 22 percent and the DAX up nearly 30 percent. Upward moves which have pretty much canceled out the falls that went before.

So what next ?

Ross Westgate
CNBC Anchor

To some degree that may depend on more central bank liquidity.

The Federal Reserve is keeping the window open on more quantitative easing (QE) but some officials like Jeffrey Lacker are pouring cold water on the idea.

Here in Britain many wonder if last week's extra 50 billion pounds ($78.7 billion) from the Bank of England will be the last.

Capital Economics says no "and even if it is reaching a limit on how much of the gilt market it can buy, there are plenty of other forms of unconventional policy that it can branch into".

Fathom goes further. "The answer is not more QE but better‐targeted QE."

It wants the Treasury to set up a "bad bank" to buy troubled mortgage‐backed assets weighing down commercial banks’ balance sheets, then allow the bank to issue bonds backed by those assets, which the Monetary Policy Committee would buy via QE.

But of all liquidity actions perhaps the biggest response has been to the European Central Bank's LTRO (long-term refinancing operation) program from December 21, particularly on euro zone bank stocks.

The second LTRO is at the end of the month, and now the ECB has loosened collateral rules even further, expect bumper demand.

But it's unlikely to have as broad an impact on risk assets as the first, simply because in December we feared a systemic collapse and so were coming of a much lower base.

We'll also realize that the liquidity is there for a reason. The program of bank resolution has only really just started in Europe.

Banks are moving out of risk assets into risk free assets of which there are only 2. Short-dated government securities or money on deposit at the ECB.

The central bank will do its best to discourage it but I fear we're going to be here for some time to come.