Daily Agenda: Markets Wait for Athens to Deliver on Terms

Major pharmaceutical merger announced; oil workers’ labor dispute on the Gulf Coast into fourth week.


Yorgos Karahalis

Markets’ positive reaction to the announcement last Friday of a deal between Greece and the Eurogroup signaled relief. The initial optimism over that news seems to be fading, however, as markets have realized, after digesting the details of the agreement, that it is far from a light at the end of the tunnel. The conditional agreement for a short-term extension is a bandage rather than a permanent solution and depends on whether or not Athens can deliver on specific terms today. For Greek Prime Minister Alexis Tsipras and Finance minister Yanis Varoufakis, the challenge in this process will be finding a balance that will not alienate their political supporters at home while placating the leaders of the European Union’s primary economies. Many observers anticipate Greece will propose a crackdown on tax avoidance and smuggling to close the budgetary gap. While laudable, few believe that the enforcement tools currently in place are capable of making this a near-term reality, thus insufficient for meeting Brussels’ demands. While spreads between peripheral debt and Bunds have tightened somewhat, as the new week begins, near-record short euro data from foreign-exchange markets suggests many investors are keeping one eye on the exit as they wait for Athens to deliver on promises.

Valeant to buy Salix. In the latest mega-merger in the pharmaceutical industry, on Sunday Laval, Quebec–headquartered Valeant Pharmaceuticals International agreed to acquire Salix Pharmaceuticals for slightly more than $10.1 billion in cash. For Salix, manufacturer of the drug Xifaxan, the merger represents $158 dollars per share, in addition to retiring debt.

Data shows uptick in German consumer confidence. Ifo Institute survey data released today indicated a marginal uptick in confidence among managers in the European Union’s largest economy despite macro headwinds. The headline business climate index rose for the fourth consecutive month to reach 106.8 versus a prior reading of 106.7. The current assessment and expectations subindexes fell slightly from January levels.

Gulf Coast refinery strike drags on. A strike staged by more than 6,500 workers at 15 plants, including 12 refineries that account for 18.5 percent of U.S. production capacity, has entered its fourth week. The United Steelworkers union is pushing for a new three-year contract with wage increases, as well as rules on safety conditions and staffing.

U.S. existing home sales on deck. In the U.S., National Association of Realtors existing home sales data for January will be released at 10 a.m. According to consensus forecasts, the annual pace of sales may dip slightly to 4.95 million houses for the month after a surge in single-family units in December reduced supplies.


Portfolio Perspective: Do Not Buy Weakness in EuropeAdam Grimes, Waverly Advisors

U.S. stocks were little changed last week. From a practical standpoint, this means that most major markets have given us no new tactical information. Despite some concerns about economic growth and stability, and challenges facing the Greek resolution, the tone of the market has been remarkably resilient. One of the less-discussed market cycles is the market’s reaction to new information, cycling from markets that swing between the poles of mania and hysteria, seemingly overreacting to every piece of news to complacency. This cycle mirrors a cycle in volatility. Most markets are currently in the complacent part of that cycle.

We are paying careful attention to inflows into cyclical sectors and small-cap stocks. That small-caps have lagged for a year is not news. But many analysts are missing what could be the turning point: shifts in that spread that could point toward small-cap outperformance. Contrary to popular opinion, smaller-cap leadership is not essential for a broad market rally, but it would almost certainly be supportive. Strong flows into these riskier — or, at least, more speculative — names do support a thesis of underlying bullish strength to the market.

Potential weakness in Europe is a glaring red flag for global markets. We think that these patterns will have to fail with conviction before global stocks are likely to see much upside. These bearish structures developed as the rallies following the third- and fourth-quarter declines in European stocks were very muted. Ideal failure patterns would probably be an attempted breakdown that is reversed by strong upside momentum. At any rate, these failures could be the critical timing cue for global stocks. We see no evidence that these failures are underway. Do not buy weakness in Europe.

Adam Grimes is the managing partner and CIO of Pittsford, New York–based research and asset management firm Waverly Advisors.