JUST one week ago, equities rallied in anticipation of the Greek Prime Minister George Papandreou winning a confidence vote over his cabinet reshuffle. That was the story, anyway. In reality, equities were oversold after six consecutive losing weeks and the S&P was testing support at its 200-day moving average. Add in a dollar sell-off and we got a sharp technical bounce in the major stock indices. If Papandreou had lost the vote, then it would be fair to say that the S&P would now have a crick in its neck from looking up at broken support levels.
Over the next few days, the Greek parliament votes again. But this time the outcomes are less certain. Now Papandreou has to persuade Greek MPs to accept further austerity measures in order to get the next tranche of money from the €110bn EU/IMF/ECB bailout fund. Assuming policymakers agree to such a programme, on Thursday they have to decide where the cuts will come from. But even if they reach agreement, parliament will struggle to mollify Greek citizens and further unrest and industrial action look inevitable.
As investors struggle to deal with the European debt crisis, it isn’t just equities which are feeling the pain. The “risk-off” trade is affecting oil and precious metals too as the dollar rallied on the back of euro weakness. Crude oil prices were already falling on concerns that slowing global growth would lead to falling demand. Then on Thursday, the International Energy Agency (IEA) announced that it would release 60m barrels of oil over the next month and oil prices slumped. This is only the third time in its history that the IEA has tapped reserves, the other two occasions being in 1991 during the first Gulf war and in 2005 after Hurricanes Katrina and Rita disrupted production in the Gulf of Mexico. The IEA’s move was viewed by some analysts as unnecessary and overtly political, and puts the agency on a potential collision course with the Organisation of the Petroleum Exporting Countries (Opec). Technically, WTI and Brent have broken below critical support levels at $92.20 and $108 respectively. Without a swift bounce-back, further losses are likely. But if Opec retaliates with an output cut, supply concerns will drive prices back up again, irrespective of any technical analysis.