The macroeconomic news is barely heartening, with inflation being one of the highest in the eurozone and the central government budget deficit unexpectedly widening in the first quarter. The political atmosphere is full of allegations of shameful deals involving businessmen, cabinet members and high-level Socialist party members. Yet the Athens stock market has been on an uptrend for more than a month. Is this just a blip, or is it the major trend reversal many pundits have been waiting for over the last three years? Just a look at the MSCI-Greece index, a component of well-known MSCI (Morgan Stanley Capital International) indices such as the MSCI-EAFE, used by foreign institutional investors as benchmarks, tell the whole story. The MSCI-Greece index has been the second-best performer in the MSCI world since the beginning of the second quarter, gaining 20.24 percent versus Germany’s 21.04 percent. All other national indices registered smaller gains, while international MSCI indexes such as the MSCI-EAFE and MSCI-Europe were gaining 8.29 percent and 11.37 percent respectively. Still, during this period newsflow was not positive, with tax auditors discovering wrongdoings in well-known listed companies such as Altec, raising a number of questions about the credibility of listed companies’ financial statements. This prompted government officials to remember the new, long-awaited law on corporate governance, audits and related issues which is expected to be voted in Parliament later this month. The news from the macroeconomic front was not much better, with headline national inflation easing to 4.1 percent year-on-year in March from 4.3 percent in February and the central bank borrowing needs rising to 4,844 million euros in the first quarter compared to an estimated 5,303 million euros for the whole year in the 2003 budget. A sharp increase in primary expenditures, expected to ease in coming months, combined with a mere 1.7 percent rise in revenues, help explain the widening of the budget deficit in the first quarter, which shows Greece’s public finances are not as healthy as many government officials claim. On a positive note, the Greek economy is still expected to grow at a satisfactory clip, with most estimates ranging from 3.5 to 4.0 percent this year, outperforming its EMU partners. One could argue that stock markets are forward-looking mechanisms and therefore that the recent steep rise of the Athens bourse is simply discounting positive macroeconomic and corporate newsflow ahead. Moreover, it is known that oversold stock markets, such as the Athens bourse in March, rebound at some point. This technical rebound may be quite powerful if some favorable conditions are in place. These may have been the end of the Iraq War, the ensuing sharp drop in the price of oil and the continuing ascent of major European bourses. Although these are factors which definitely helped improve market psychology, reduced risk aversion and facilitated the flow of foreign funds into the Athens Stock Exchange, their impact should have been milder and shorter in duration. One would also argue that they should have been at least partially offset by all the unfavorable domestic developments outlined above. Still, the most convincing argument about the Athens bourse’s rally in the last month or so seems to be the better-than-expected first-quarter financial results of index heavyweight National Bank of Greece. National’s group pretax profits were down about 18 percent year-on-year in the first quarter versus an expected 36 percent. Guidance provided by Commercial Bank governor Yiannis Stournaras, indicating slightly higher profits compared to a drop forecast by analysts, also helped sentiment and prompted some analysts to revise their estimates upward. These developments, along with detected purchases of bank stocks by foreign portfolios, caught many domestic institutional investors, who were underweight banks for a long time, off guard and forced them to increase exposure so that their funds don’t trail the benchmark indices. The recently announced revision of MSCI indices, effective on May 30, which saw National Bank increase its weight in the MSCI-Greece index, also provided a boost, accelerating the process. If the pleasant bank surprises help explain the significant gains recorded by the Athens market in April and early May, does it mean there is a major trend reversal? The answer is no, at least not yet. There is doubt that fundamental market psychology has improved, and the increased earnings visibility of main Greek banks provides a cushion against a sharp decline. The behavior of Greek bank shares will largely determine the course of the Athens bourse in the months to come. With big Greek banks trading currently at a premium to their European peers, the chances for a correction are high. Unlike past bank stock corrections that turned into free fall, the expected correction should be mild, reflecting their improved profit outlook. For Greek bank shares to break on the outside and pull the Athens market along with them, they will need either some outside help in the form of European bank shares cruising higher, or continued positive earnings themselves. Other than this, it could take a major merger and acquisition deal with a large foreign bank or a change in government to create a rally. The Athens bourse tends to rally before or around general elections, when it senses the emergence of a strong government willing to proceed with structural economic reforms. It happened in 1990, 1993 and on other occasions and it may happen again this year if general elections are called. The ASE’s recent rally does not seem the beginning of a major trend reversal. It may signal, however, the end of the three-year steep drop and the beginning of a consolidation period with an upward bias, in which stock picking is the rule of the game.