Thursday was the day capital markets hoped to see some agreement with regard to the Greek crisis. Yields on Greek bonds have fallen over the past few days. 10-year bonds now yield just over 10%, from a high 13.5% in late April. 2year yields remain above 10-year yields however they have also fallen to 22% from nearly 30% a few weeks ago. This would suggest that bond investors are of the view that a solution will be found before the end of the month. Investors will hope for a longer-term solution to the crisis, or they may have to go through painful negotiations again in the coming months. According to news reports on Bloomberg later in the afternoon an EU official was quoted as believing that Greek documents can be a basis for a deal.
US equities drifted lower as the day wore on, a lack of news from Europe apparently taking the blame. The Dow transport index and the S&P 500 index have diverged in the past months from their dual paths. The S&P 500 has traded in a range of 2080 to 2130 for most of the year. The Dow transport index, considered by many to be a lead indicator of economic activity, has now fallen 10% from the start of the year. Some analysts are likely to point to this fact as an indication of a weakening economy, however comparing the performance of both indices over the past 2 years, the recent fall in the transport index brings its performance in line with that of the broader market.
Should a solution to the Greek discussions come about, one assumes there will be a relief bounce in equity prices. It may be that the bounce will be short lived, in a similar way to the short-term bounce in UK equities after the election result. Investors may remain cautious chasing returns in the quieter summer months, waiting to see which way the Federal Reserve might move at the end of the holiday season.