Bernanke and Greece deal speculation sparks stock recovery into market close

Speculation that Greece was nearing an agreement over the strict austerity terms dictated by the Troika as part of the new bailout agreement helped to lift stock markets from their lows on Tuesday, with indices staging a rally into the market close, with the FTSE finishing the day flat.

European indices started the day on a bit of a whimper after several company earnings including UBS missed expectations, putting a bit of a dampener on investor sentiment. Whilst at the same time continued uncertainty over whether or not Greece will agree fresh austerity measures in time for it to receive the next bailout funds and avoid a default also convinced traders to reduce some risk. This forced the FTSE 100 to trade as low as 0.7% by early afternoon.

Speculation over a Greek agreement
However, reports from a Greek official that the government was preparing the official text of an agreement on the €130bn bailout package gave room for some optimism that talks were progressing and could be agreed in a late meeting of Greek politicians. The euro hit a new eight-week high against the US dollar on the back of the speculation, whilst stocks rallied well into the close, with the FTSE 100 trading back towards flat territory and bouncing from daily lows in the final 90 minutes of trading.

Bernanke testimony helps stocks and gold
Comments from Ben Bernanke at his testimony to the US Senate were also seen lifting investor moods. Bernanke maintained the same dovish tone that he issued in the last FOMC meeting, echoing that the US still has a long way to go before the labour market may operate normally, despite a strong recovery in hiring in December and January. He also stated his concerns over near term fiscal shocks and the fact that consumer confidence still shows subdued expectations for earnings growth.

His comments have helped to counter any concerns that last month’s strong jobs data could derail the potential for the Fed to announce a third phase of quantitative easing, lifting stocks and gold prices whilst weighing on the US dollar.

Miners weigh on disappointment over Glencore premium offered
Most of the drag on the FTSE originated from investors profit taking in both Xstrata and Glencore on concerns that shareholders will not vote for the recommended merger deal.

Both firms’ shares lost 3%-4% after Glencore’s offer value of $41bn for the remaining 66% of Xstrata shares which it does not currently own, a premium of 15.2%. The concern for speculators who had bought into the firm’s shares on the back of the merger talks is that this may not be enough of a sweetener for Xstrata’s shareholders. With some large shareholders already indicating their motivation to vote against the merger, the concern is it may not progress unless Glencore can boost their premium offered to levels that might satisfy Xstrata’s key shareholders, and this is likely to need to be at 20% or higher.