Greek / EU Agreement in Principle - Almost, Sort of, Maybe

According to the various financial news wires, sources in Brussels have reported that Greece and the EU have reached an "agreement in principle" related to the outstanding debt issues that have dominated the news for the past month.  These sources state that the details are still being worked out, but are expected to be finalized and signed on Monday following an agreement that Greece would remain under the terms of the EU bailout program.

You could hear the FX, Bond, and Equity markets all breathe a tremendous sigh of relief following that breaking news.  Treasury bond yields improved, equities futures improved, and the Euro gained against the US Dollar all on the word of an unnamed source that an agreement - minus the details - had been reached.

Is the market setting itself up for disappointment and the significant drop that always follows?  Quite possibly.  Barring other news, there's a high likelihood that equity markets will surge, especially in Europe, and that may well flow into the morning session in the US tomorrow.  The greater the surge, though, the greater the potential for a significant drop heading into the weekend or on Tuesday if an actual agreement fails to manifest.

Such a failure is very possible.  Despite the optimism coming from this unnamed source, both Greece and the EU were very quick to dismiss any such agreement in principle.  Other sources involved in the negotiations stated that no agreement had been reached, which, barring any details, is certainly true, however they floated the idea that the existing terms of the bailout could be extended.  It's very likely that that is indeed one of the offers on the EU side of the table, and given the hard-line stance taken by Germany in recent weeks, that could be viewed as a concession.  The likelihood of Greece accepting it, however, is very slim.

It's important to remember the results of the recent Greek election.  There was a very clear mandate from the people in support of the Syriza platform, and the fledgeling coalition government will be under extreme political pressure not to accept terms that are in direct opposition to that platform.  In fact, an unnamed representative of the Greek government was very quick to dismiss the bailout extension idea as a non-starter. 

So how optimistic should we be regarding the "agreement in principle" news?  Without any details surfacing, I'd be very cautious.  As additional information comes out of Brussels, there's a high potential for significant volatility, at least until there is word from both sides that they have truly reached an agreement.  Remember, Monday is a holiday in the US and the equities markets are closed.  I will be keeping my trades very short term, and will look to close my short-term open positions before the weekend.  The true deadline to settle the Greek debt issue is still two weeks away, which leaves plenty of opportunity for political brinksmanship from both sides of the bargaining table.  Be sure to factor in that volatility when you line up your trades tomorrow.