European Officials Setting Stage For Another Rollercoaster Ride (EWP, VGK, EUO, FXE, EWG, EWI)
Tom Essaye: As someone who has closely watched this European saga for two full years, I have seen a discernible pattern emerge …
At its core, the European crisis has been one of confidence. Europe has always had the means and ability to “fix” the problem. The questions that have concerned markets revolve around whether or not European leaders have the will to actually come together and fix it.
Since June 2010, when the Greek crisis first broke, we’ve seen European leaders let Europe reach the brink of disaster. Then only at the last minute agree to some significant measure that quells the crisis.
But invariably, European officials have been too quick to “declare victory.” And now for the third time, the crisis is re-emerging after the measures that temporarily arrested it are removed.
It again speaks to the market’s core concern — that the European officials are interested in averting a disaster, not fixing the problem.
The market realizes that. And as a result assumes (correctly so far) that just like a weak putt on the green that fails to get up over a ridge, once the ball makes one roll backwards you know it’s eventually going to come all the way down.
And it’s the same thing with the euro zone — once cracks begin to emerge, everyone assumes we’re on our way to another crisis.
Spanish Bonds Soaring!
ECB Chief Mario Draghi made what I think was a very dumb comment this week. He said that higher rates for Spain was the market’s way of exerting pressure on the Spanish authorities. That statement tells me he doesn’t really understand markets, because it’s something an academic would say.
Spanish bond yields spiking to close to 6 percent isn’t going to teach the Spanish government anything. That’s because it’s not going to make the unions more apt to negotiate, or make the populous suddenly realize that it’s in their best interests to have massive austerity unleashed upon them when they’ve sucked off the government tit their entire lives!
We know that European officials will act to avert a crisis. So to a point there is a “put” inherent in the market (what that means is that you’re protected on the downside because you know the officials will eventually save the day, so you can afford to be risky).
But we also know that European officials will let the crisis walk right up to the point of disaster. And that sort of a roller coaster ride is death for markets.
We’ve seen this act before — and as the SX7P breaks down, and Spanish yields approach 6 percent, I’m afraid we’re in for another dose of it.
Related: iShares MSCI Spain Index (NYSEARCA:EWP), Vanguard European ETF (NYSEARCA:VGK), ProShares UltraShort Euro ETF (NYSEARCA:EUO), CurrencyShares Euro Trust (NYSEARCA:FXE), Germany Index Fund (NYSEARCA:EWG), iShares MSCI Italy Index (NYSEARCA:EWI).
Have a good day,
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