Short Term Trading forex trading links forex trading books market statistics trader values euro and us dollar Shocks Crashing Greece: Appointment with History

Saturday, 24 September 2011

Greece: Appointment with History

(Image by gnews via Flickr)
Was it just the old saying: “Buy the rumor, sell the news”?  Or there were something more to it? In effect, once the “Operation Twist” became a reality, markets scream for help could not have been louder. Stock indexes were down, as well as gold, while the dollar set new highs against the majors. It was an unmistakable vote to further weaknesses ahead. Or was it not? The Greek tragedy is close to an end.

Now or later, it would depend on E.U. willingness to provide fresh capital to Athens. Confidence is fading and the E.C.B. could cut rates again by the end of the year. What will the euro do?

Twisting, but not for long.

After days of rumors, “Operation Twist” was brought back to life with the aim to provide a boost to the economy, similar to quantitative easing. The Federal Reserve will extend the average maturity of the U.S. Treasuries in portfolio by selling short term bonds and buying longer term Treasuries. In addition, hoping to support the mortgage market, expiring agency debt securities will be converted into agency mortgage-backed bonds.
Will it work? Few options were available, considering current inflationary scenario. In addition, the Fed wants to facilitate both employment and stability. Operation Twist should reduce the pressure to the real estate and government owners by increasing the duration of debt at a little cost. It might also alleviate the stock market weakness over the short term. However, the effects could be short lived.
S&P is set to Dive over Time?
Long term interest rates have been low for a while without boosting business investments, if we consider the share within the Gross Domestic Product (GDP) cake. Households are still heavy in debt. Deleveraging is in progress, but it will take years to be completed. According to Flow of Funds Accounts from the Federal Reserve, since 2009, households’ debt fell more than 10 points as a percentage of GDP. Increasing savings will be the next step. Getting back on track is challenging.  Confidence is needed for spending to pick up. Nonetheless, there is not much more Fed can do to reinvigorate an anaemic economy.

The ball is now in Capitol Hill field. A set of proposals are on the table, but politicians appear too busy preparing to win the next elections. So, economic cycles will run their course. Stocks could dip, before starting to climb again. In fact, the S&P 500 appears set to test 1050/1000 and eventually to dive to 900/850 over time. The cyclical bear (lateral) market that started in 2000 is still in action. If history repeats its course, it might continue for 14/17 years from top (1999/2000) to bottom. During these lateral movements, the market has shown the tendency to top every 4 years and to bottom every 3/5 years.
The Greek tragedy is ending? What is next?
Will Greece receive additional financial aid?  Or, it will default?  Negotiations have intensified during the last days. The triumvirate (ECB, EU and IMF) is flying from Brussels to Washington D.C. They will be back to Greece next week to finally determine Athens suitability to new funding. There is not much that can save Greece, unless an unexpected event sets in. The debt is huge and increasing. For the Greek society (not only for them), adapting to the new reality is too painful.
So, it is just a matter of time before the final splash. Now or later, it will depend on the E.U. willingness to put up additional financial backing. The European parliaments will have to vote the approval of the new European Financial Stability Facility. Finland will be next and then is up to Germany. The whole majority of 17 European countries sharing the Euro are requested to approve the new EFSF. Time is limited. The appointment with history is quickly approaching.
Euro: How much is left to sell?
In this weak economic environment, the E.C.B could cut interest rates by the end of the year. The composite PMI for activity declined to 49.2 in September, the lowest level since July 2009.  The PMI for new order fell instead for the second month in a row. Employment is contracting.  In September, the ZEW expectations index, which tracks the opinion of about 300 investors and analyst, declined for the seventh straight month. It is at the lowest level since December 2008.
What will the Euro do in this ever changing environment? The short/medium term trend is still pointing to the downside.  A decline to 1.33/1.30 is possible, if the level of 1.3790 is not overcome. With Greece defaulting, panic could set in.  However, how much is left to sell? With Greece about to collapse, gold lost 15% from the top. The next two weeks will be critical for the euro and for Europe as a whole.
Angelo Airaghi,
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