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Pisani: Why Commodity Stocks Rallied

Commodity and energy stocks rallied as the euro finally became so oversold that traders began buying it, thus weakening the dollar.

There may also be a secondary reflation trade in play: the unusual move in copper (up 4.7 percent at this writing) widely noted on trading desks.

George Gero at RBC attributes the gold rally to:

"Relief that Greece will be handled without having to sell gold as the ECB has annual gold sales pacts with member banks as well as investment needs for upcoming ETF products."

On Greece, the key point is that there is some kind of agreement to provide aid. (Counterpoint: Art Cashin: A Nagging Question re Greece Bailout)

There is a EU meeting of finance ministers next Tuesday and Wednesday. There, they will likely come out with more formal language and elaborate on what type of aid will be forthcoming.

Here's what traders are assuming:

1) the most likely form of aid will be direct loans; we are talking about a bunch of European countries lending money at low rates (4 percent or so) to a bunch of other European countries.

2) possible, but less likely, is that the Germans, or anyone else, will directly buy Greek debt; or implicitly or explicitly guaranteeing Greek debt. This would seem to violate treaty rules.

3) MUCH less likely is the idea that the EU will start issuing Eurozone bonds.

So why is everyone still so gloomy?

1) it does not move the needle much in terms of dramatically lowering debt in the countries that aren't seeing much growth; and

2) there is widespread belief that Greece will not be able to sell the deal to the electorate—social unrest will be huge.

At bottom, the Greeks have the same problem that all European countries (and the U.S.) have: they have promised their electorate too much in the form of pensions and entitlements, and they do not collect anywhere near enough taxes for it.

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