Don't read too much into the recent rally--the shorts are covering ahead of Sunday's election in Greece

06/15/2012 3:27 pm EST


Jim Jubak

Founder and Editor,

The uncertainty about the results of Sunday’s elections in Greece—will the country vote to leave the euro (a vote for Syriza amount to this, in my opinion) or to keep to the very painful terms of the bailout deal (a vote for New Democracy)?

It’s that uncertainty, rather than any actual good news or hope for good news (such as coordinated action by global central banks) that is driving financial markets in Europe and the United States higher today.

Think of it this way. Right now nobody is long Greece. Nobody has been going long Greece in the last few days. And I think that goes for Spain and Italy and France and Ireland too.

But bears that have been short Greece and the other parts (or all) of the EuroZone aren’t piling on more bets on a disastrous Greek vote on Sunday either. The results of the election and the reaction to the results are just too hard to predict.

So if you’ve been short Greece, over the last few days you’ve been covering those positions by buying whatever assets you had previously shorted. You’ve got your profits and now it’s time to protect them. For example, if you’ve been short Spanish or Italian government bonds, you’ve been buying to close out those positions. The yield on the Spanish 10-year bond fell to 6.85% in early trading and the yield on the Italian 10-year bond dropped by 0.1 percentage point.

Not because you believe that the Bank of England’s 100 billion pound program of quantitative easing (cheap money to banks for loans to businesses) will significantly stimulate the U.K. economy. Or because you think the G20 summit right after the Greek election or the Federal Reserve meeting in the middle of the week will produce anything that might be a solution to the crisis.

But because you don’t know how Greek voters will cast their ballots and because you don’t know how the financial markets will react to the results of the Greek election.

So the shorts are moving to the sidelines and that pushes the market up in the short term. But I wouldn’t read anything more than that into the market’s direction of the last few days.
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