…eager, but not exuberant. Friday was a continuation of Thursday’s strong performance: broad-based and this time with a little more strength in the emerging market space. The market seems to be looking for a reason to breathe a sigh of relief and finding it in receding risks after a volatile start to the year. The rally has legs, driven by positive earnings in the US, commodity reversion, Russia’s peace deal, and some economic news from Europe beating estimates last week. But with Greece hanging over everyone’s head, it may be a bumpy ride.

Early morning news out of Europe on Friday showed year-over-year GDP growing at a 0.3% rate, beating consensus estimates of 0.2%. As that print came in at 5:00 AM EST, European equity markets rallied and held gains. However, a one-tenth-of-1% surprise is pretty insignificant. GDP surprises rarely indicate future returns. Since 2006, the average quarterly return of the Spider Euro STOXX 50 ETF (FEZ) was -0.8% following a positive GDP surprise. The underlying risks remain for Europe—namely, Greece.

Russia is reverting hard: Is it sustainable?

Obviously, headline news in Russia has centered on the deal Putin signed for a ceasefire. The stick and carrot campaign seems to have Russia getting in line. Globalized economies have a funny way of making tyrants spend 16-hour sessions at a negotiating table. Indications from the EU suggest that a normalization of relations will be commensurate with Russia’s compliance with the ceasefire and not impeding the EU-Ukraine trade and political pact.

These are the headline effects on Russian stocks. The real underlying story is much simpler. Oil goes up, Russia goes up, and if the oil rally proves to be unsustainable, Russia will follow suit. As one of our elder statesmen in Arizona eloquently put it, “Russia is a gas station masquerading as a country.”

Hardball from the EU

All eyes will be on how the saga between Greece and the Troika unfolds this week. Greece was issued an ultimatum to extend the current 240 billion euro bailout by the end of the week or lose the cheap loans that are crucial to its fragile banking system. Without access to these loans, Greek banks would be forced to pay higher rates from the Greek central bank. Greece wants less austerity and loan repayments to be directly tied to its future growth.

Greece as well as other Eurozone markets will be punished until there’s resolution on the negotiation process. Greek credit default swaps are at their highs, and sovereign bond yields are above 10%. Greek yields were above 30% in 2012’s EU crisis, but the risk of Greece leaving remains. If Greece exits the EU, credit markets would be hit immediately—in Europe especially. As this situation remains unresolved, the euro will continue its inevitable path towards parity versus the US dollar, maybe even going lower.

The market is looking for good news to continue to push asset prices up. Given the CPI prints coming from the UK and other European countries earlier this morning, deflation persists, reminding the markets that Europe can’t afford not to make a deal.

MarketRealist