Stocks Erase Most 2010 Gains On Greece Fallout, Rates Better As Bonds Touch 2-Year Highs. What To Expect Friday.

AcropolisNowEconomistThe Economist’s cover story headline from last week—Acropolis Now— sounds all the more fitting today as Greece citizens and police clashed in the streets, and the Dow, S&P 500, Nasdaq all erased most of their 2010 gains, and safer bond investments rallied: mortgage bonds are up 43bps, 10yr Treasury bonds up 115bps. When bonds rally like this, rates drop. Scroll to our data section for updates on key stock, bond, currency, and commodity markets.

As of now, there’s lots of talk that the stock selloff was caused by automated program trading errors (for example, Accenture traded to $.01 momentarily then bounced back and closed at $41.09 which is in line with its normal trading levels), but few question that the impetus was unrest in Greece and fallout from the $140b bailout by the EU/IMF. The bailout was needed as Greece’s obligations on maturing debt over the next few years will be more than their tax revenues. The solution—and a condition of the bailout that was ratified in Greek parliament today—is an austerity bill which forces Greece to cut spending and raise revenue. Measures approved today include tax hikes and big cuts in public sector bonuses that affect one-fifth of the workforce. This is why Greek citizens are rioting. But the country has no other choice. As part of the EU, they can’t devalue their currency nor cut interest rates, so this bailout with the austerity measures is the only solution.

As for tomorrow, the Bureau of Labor Statistics April Jobs Report will be released at the market open. Estimates range from 175k-190k jobs added (which includes census jobs) and 9.6% to 9.7% unemployment (the latter is where unemployment is as of last month’s reading). This report always moves markets but will do so even more tomorrow. A better than expected jobs report would help stocks rebound, but that good news will still be battling against the European debt crisis.

With mortgage and Treasury bonds at current levels, it seems improbable they could put up another rally of this magnitude, the only way it could happen is if the jobs report was worse than expected. Since mortgage rates are tied to mortgage bond trading—and mortgage bonds hit best levels in 2 years at one point toward the end of today’s trading before backing off—consumers looking to lock rates should do so as quickly as possible and lock in gains. Given the severity of the European debt situation, a big bond selloff pushing rates meaningfully higher also doesn’t seem probable, but profit taking does seem likely, and that would push rates up slightly.