CONCLUSIONS FIRST . . . 

Obviously, the Greek political-economic-financial catastrophe has been the chief  headline for weeks.  The election of 11 days ago threw both politics and finance into turmoil.  The vote was split among many parties, and in fact, about 70% of ballots were for parties which want to repudiate the Greek rescue package with the European Union, IMF, and ECB.  The parties have not been able to form a governing coalition, so that there will be new elections on 17 June (and maybe more if that vote also produces a "hung parliament").  Due to this the markets have begun to aggressively price in the likelihood that Greece will default on its debt, leave the Eurozone and revert to the drachma (or "new drachma"). And that – even the threat of it – also increases the risk of something similar in Portugal, Spain, Italy, even France.

Bad news keeps coming to the surface all over the Mediterranean countries, Greece most prominently, where today there are reports of very large withdrawals, as much as €700 million in the last week, from Greek banks (against the possibility that after an exit from the Eurozone, deposits will be redenominated into a new, weaker currency or outright confiscated), the ECB has temporarily suspended payments it was to make to Greek banks to recapitalize them until the Greek government adds €29 billion in capital that it was scheduled to put in (that may occur next week). 

Besides Greece, there is a lot of attention to Spain.  Bankia, a large new bank, which was cobbled together from several failing regional savings banks and is partially state-owned, had to replace its chairman, is suspected of very bad management, and is suffering from rumors that €1 billion has been withdrawn (this is denied).  Additionally, there is a risk of default by the regional government of Valencia.  

France's election of the Socialist candidate François Hollande as President is less of a shock, but it was a worry to markets, also (at least until it became evident that no Greek government could be formed). Little has come from France since the election, but based on things Hollande said during the campaign, there could be far less widespread European support for rescue packages.

These are the worries that are pushing down the Eurocurrency. Its oversold condition makes it ripe for a sudden retracement upward (this weekend would be a good opportunity as the G8 meets in Washington and NATO meets in Chicago, so Merkel, Hollande and the rest will be talking to one another a lot, and surely the European stress will be a major topic of discussion and perhaps they will produce some new "rescue" that can at least provide a respite.)

All this will also continue to keep support under the Treasury and Bund prices. No one likes these bonds, but they can't find a better place – or safer place, more to the point – to park capital, maybe for years.  It will still be interesting to see how the domestic U.S. factors treat Treasuries after "Twist" is finished in a few weeks, but we have to climb over the Pyrenees, the Alps, and  the Rhodopes before that is front-page news. 

To be sure there are major worries in the United States, but even they are probably Treasury-bond-bullish. For instance, there is more and more discussion of the so-called "fiscal cliff" around the end of this year.  That is the prospect of a huge decline in the federal budget deficit which looms if Congress cannot agree on some combination of spending cuts and tax increases to rationalize the budget.  In that case, automatic and untargeted cuts and tax increases go into effect which will be economically contractionary and financially disruptive.  But, even that would enhance the safe-haven appeal of Treasuries and reduce the level of federal borrowing.

For more information on these markets, contact Larry at 312.242.7943 or via email at lawrence.morgan@archerfinancials.com.

Larry Morgan's specialization in futures brokerage is interest rate and foreign currency markets.  For 30 years he has dealt primarily with institutional clients trading, hedging, and arbitraging in those markets – banks, insurance companies, corporate treasury departments, hedge funds, and individuals, from North America, Latin America, Europe, and East Asia.  

Much of his brokerage career was in the futures division of Dean Witter Reynolds and its successors Carr Futures, Calyon Futures and Newedge.  He began in the futures business in 1976, in the economic research department of the Chicago Board of Trade, where he was part of the team that developed U.S. Treasury Bond futures contracts and later Treasury Note futures.  Larry has been with Archer Financial Services since 2009.

He has frequently written for trade and academic publications, spoken at conferences, and participated as an instructor in schools on financial futures.

Larry holds the designations of Chartered Financial Analyst (CFA) from the CFA Institute and Financial Risk Manager (FRM) from the Global Association of Risk Managers, as well as an MA in Economics from the University of Chicago.  To contact Larry, please send an email to lawrence.morgan@archerfinancials.com or call 877.377.7944.