The Day Ahead: Greece Out, Fiscal Cliff In, 5yr Auction

With Tuesday's session in the books, it's now plain to see just how aggressively markets had priced in some sort of resolution to the most recent round of Greek bailout bargaining.  The fact that it was priced in to a large extent isn't so much of a surprise.  In fact, I called attention to it yesterday morning saying that Monday night's agreement amounted to little more than can-kicking and the market's response to the initial news was a small speck of positivity versus the past two weeks.

As it happens, that small speck of positivity seen in the Euro was sold in relatively short order.  Comments on Tuesday morning from German officials foreshadowed a parliamentary approval process that could shape up as something other than "smooth," and helped maintain the risk reversal for the Euro and a moderate amount of support for domestic bond markets despite stronger-than-expected economic data.

Tuesday, in fact, ended up to be all about the Fiscal Cliff (after the Euro drama ran its course).  Senate Majority Leader Reid was on the wires at 2:22pm conveying his disappointment at a lack of progress on Fiscal Cliff negotiations.  This caused an abrupt sell-off in equities and and piqued the late day bullish interest of bond markets to boot.  I heard an interesting counterpoint to this chain of events to the effect of: "Reid wasn't disappointed with a lack of progress on negotiations, period...  It was a lack of progress WITH REPUBLICANS." (Ohhh...  I see what you did there...)

To counterpoint the counterpoint, I'd probably call attention to the fact that Fiscal Cliff negotiations only exist at the pleasure of bipartisan politics and naturally, any "disappointment" on the part of a democratic leader is going to be with the republicans and vice versa.  In other words, 6 of one, half a dozen of the other.  Disappointment with "the other party" is still disappointment.  And "failure to make progress with the other party" is still "failure to make progress."  

Long story short, and the reason I'm droning on about the Fiscal Cliff is that it remains a justifiable cause for a moderate vote in favor of bond market bullishness and equities sell-offs when comments come out like those seen on Tuesday.  Wednesday's session is reasonably sparse compared to its neighbors so the door remains open for additional Fiscal Cliff rhetoric and I'd imagine markets remain willing to react to unexpected cliff-related headlines.