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Daily Agenda: Greece and the EU — Yet Again

Banking investigation shines a spotlight on tiny Andorra; Holcim directors reject merger with Lafarge, GE to spin off unit.

A new week of Greek debt negotiations means a new week of drama. Over the weekend Yanis Varoufakis, the country’s finance minister, made public statements condemning the Eurogroup’s demands and regretted his decision to appear in a French magazine in a layout that depicted his own lifestyle as being relatively opulent. While the Mediterranean nation continues to be the topic of market risk narratives, it is clear that the commencement of European Central Bank bond buying is the big story for markets. The DAX broke 12,000 in trading today, a new record. Later today, the ECB will release a report detailing the progress of the program followed by a speech by Bank president Mario Draghi. With the euro rapidly approaching parity with the U.S. dollar, it appears that monetary policy for the 19-country currency remains a primary focus for sentiment in the lead up to the announcement Wednesday from the Federal Reserve in the U.S.

Andorra sees tax raid. The U.S. Treasury has designated the Banca Privada d’Andorra a “financial institution of primary money laundering concern.” Investigators charge that the firm harbored funds resulting from criminal activity from groups in China and Russia. The CEO of the bank, Joan Pau Miquel Prats, has been taken into custody and bank subsidiary Banco de Madrid subsequently filed for bankruptcy protection today. News of the charges has been particularly controversial in Spain, where the wealthy have traditionally used the principality, nestled between France and Spain in the Pyrenees Mountains, as a tax haven. Standard & Poor’s downgraded the credit rating of the principality on Friday as a result of the increased international scrutiny.

Holcim-Lafarge merger challenged. The board of Swiss cement maker Holcim has rejected terms for a proposed merger with French rival Lafarge, announced in April. Officials at Holcim argue that shareholders of their firm should have a more significant stake in the new entity, which was initially proposed on a one-to-one share combined basis. Billed as a “merger of equals,” the deal would have combined the world’s top-two cement producers.

Economic data in the U.S. on deck. Industrial production figures for February will be released today with consensus forecasts for no major shift in activity on the factory floor. Separately, January Treasury International Capital data from the Federal Reserve will give investors a glimpse into how international investors are wagering on a strong U.S. dollar.

GE to spin off unit. In a $6.3 billion transaction, General Electric announced today that it will sell its GE Capital consumer financing division in Australia and New Zealand to a consortium of investors, including Deutsche Bank and private equity firm KKR & Co. The business unit, with more than 3 million accounts in that region, includes credit cards branded under regional retailers brands. The bank will retain its Australia and New Zealand commercial lending units.

Portfolio Perspective: Priming the PumpAdam Grimes, Waverly Advisors

Stocks were down across most of the developed world last week. In the US, most indexes saw minor declines. On a volatility-adjusted basis, these moves might seem to be nearly insignificant. But they do come at important structural points. Even minor declines here erode much of the short-term potential for a stock market rally and leave us with no clear directional patterns.

It is worth considering two factors here. First, the economic environment and second, the tactical environment. Uncertainty weighs on the economy. One of the biggest factors in traders’ minds seems to be the eternal “will they or won’t they” argument with respect to the Fed, although this is probably far less important than most of us think. The Federal Open Market Committee meeting on Wednesday may be a colorful, with arguments for higher inflation meeting conflicting data from producer price index and import prices, the impact of a clearly strengthening labor market and of course, the 800-pound gorilla in the room — the explosive bull run of the U.S. dollar.

There are some other points of economic concern: uncertainty of the upcoming elections in the U.K.;, lingering concerns and drawn out negotiations to resolve the Greek crisis; the decline of the euro; and the beginning of the ECB’s bond buying program. These factors led to a significant dip in European stocks last week. For several months, we have looked for what we have described as a bearish failure in EU stocks to lead to a potential broad and sharp global stock rally. To be clear, what we have been looking for is a sharp decline — an attempted sell-off that gets many traders and investors concerned about the future of EU stocks — and then to see that decline reverse with strong upward momentum. EU stocks have not shown the type of downward momentum needed to set up this failure. Last week’s decline may finally have primed the pump for that potential reversal.

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

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