IS THE RISK TRADE BACK ON?
Something doesn’t add up here. With the bailout of Greece now a near certainty, the European Union has essentially pledged to be the lender of last resort for all struggling European nations. As I’ve repeatedly maintained, this is a terrible precedent. What doesn’t add up here though is the market’s reaction to this news. In essence, the risk trade has taken off. The Euro soared on the news, the dollar tanked, commodities exploded and all risk assets shot higher.
EUR/USD
Curiously though, this is anything but a Euro strength story. In fact, this is a Euro weakness story. For now, this looks like nothing more than a knee-jerk reaction by the massive short position that has recently unfolded in the Euro. This does not strike me as a “risk on” event. In fact, it strikes me as quite the opposite.
The west is on the verge of collapse
I’ve been saying this all day. This is not a strong EUR story. This is entirely knee jerk. Anyone looking for an inefficient market reaction need look no further. This is 100% pure short covering in the eurodollars.
It’s certainly interesting (though not a shocking initial reaction), the question will be whether this move continues for a couple of days or peters out.
I tried to get my boss to sell some of his junk into it, with little success…sadly!
there is nothing to lament when countries that are a party to a monetary union decide that they must overcome political obstacles to preserve stability for their currency. this is all in their best interest. i think that i would rather see financial markets return to stability than some currency speculators make a fortune, even if this involves another embrace of moral hazard. after a financial crisis, there will be an extended period of time (to use the phrase) during which the best choice is the less bad choice.
Actually this has been happening for 20 years. Fed lowers, IMF “bails out” Asia, NASDAQ sky rockets (1998). I think/regret this may be very positive for US stocks.
TPC,
You are dead on that this is not a good sign for the eurozone or the euro. There really is no good way out of this predicament for them, but just like us they chose to kick the can down the road. Now you and all other traders know exactly what is coming. Instead of attacking Greece all of the traders and hedge funds will be shorting the euro, and there is no way that it will withstand that attack for very long without some really bad results for the euro. Of course that will not be good news for us because many of our major companies are international. This is just the start, and anyone piling into the market will be buried sometime in the next 5-6 weeks. Greece looks like the EUs Bear Stearns to me, and whoever goes next will be their Lehmans. That will start the cascade that will take us all down.
From a mkt perspective: almost all risky assets were short term oversold and divergent, they just needed an excuse to rebound. Long term scenario is indeed scary, I will sell the strenght for a test of the 1020 area (at least) on S&P.