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 While European markets are braced for a wave of contagion from
Greece on Monday, as a result of a possible "Grexit" that most had
still assumed was unlikely as late as Friday afternoon, the effect
on U.S. markets is expected to be bumpy, but not as dramatic as in
Europe.
Athens is due to miss a 1.6 billion euro ($1.8 billion) repayment to
the International Monetary Fund on Tuesday. With its creditors
unwilling to extend the country's bailout, Greece's banks will not
open on Monday and capital controls are to be imposed.
The dollar gained against the euro in early Asian trading, and U.S.
government bonds should see a safe-haven bid from investors wary of
European equities.
The U.S. equity market will probably see some volatility on Monday,
but safeguards against contagion introduced since 2010, when the
possibility of a Greek default first shook markets, has many
expecting only modest losses in U.S. stocks.
"Beyond volatility tomorrow, perhaps, there shouldn't be much
effect," said Ken Fisher, founder and CEO of Fisher Investments.
"Greece bank closure should be pretty fully discounted. That's what
markets do for a living."
Wall Street's reaction ahead of previous deadlines in Greek
negotiations has been quiet compared with European financial
markets. However, some U.S. investors expect more than just a rough
session of trading.
"We're coming up on zero hour for this crisis and it may well be
that a number of investors will prefer to wait on the sidelines for
the dust to settle,” said Alan Gayle, senior investment strategist
at RidgeWorth Investments in Atlanta, which has $50 billion in
assets under management.
MAIN STREET SHRUGS
One ray of hope for investors could be an unusually long streak of
ambivalence on Main Street.
Seen by some as a contrarian indicator of future stock market
performance, a weekly poll of individual investors showed positive
sentiment for stocks remained below average for the 16th straight
week despite a solid uptick in optimism.
The last time bullishness in the American Association of Individual
Investors' sentiment survey remained below average for so long was
in August 2012.
Many professional investors view enthusiasm among do-it-yourselfers
as a warning that the market may be overheating. Conversely,
widespread caution is often taken as evidence that stock prices are
well-grounded and not forming a bubble.
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"The market climbs a wall of worry and if there's some bearishness
out there it means there's potential buying power on the sidelines
that could come back into the market," said David Joy, chief market
strategist at Ameriprise Financial in Boston, where he helps oversee
$815 billion in assets under management.
Indeed, individual investors have pulled $56 billion from U.S.
equity funds in the past 26 weeks, according to EPFR Global, which
tracks fund-flow data.
While Greece's financial instability and the possibility that the
U.S. Federal Reserve could soon raise interest rates remain risks,
Gayle, Joy and others said they still expect U.S. stocks to go
higher over the medium term.
The strengthening economy suggests the Fed could raise interest
rates this year even as inflation remains well below the U.S.
central bank's 2 percent target. Many economists expect a rate hike
in September.
The S&P 500 <.SPX> and tech-heavy Nasdaq <.IXIC> hit all-time highs
in recent months, with markets bouncing back and forth in a limited
range since around February as many investors fixate on the Fed.
Several data points next week will give fresh reads on the health of
U.S. consumers in June as the Fed weighs when to increase rates.
On Thursday, Labor Department data is expected to show nonfarm
payrolls increased by 232,000 in June, with the unemployment rate
edging down to 5.4 percent from 5.5 percent in May. Consumer
confidence is due on Tuesday and domestic car sales are due on
Wednesday.
"The production side of the economy is doing OK," said Joy. "It's
the consumer sector that's most important for us right now. And of
course, Greece."
(Additional reporting by David Gaffen in New York; Edited by Linda
Stern and Matthew Lewis)
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