Let’s discuss the general state of the broad markets and what traders are experiencing. While BIG questions continue to lurk for Europe regarding its financial crisis, which at heart is about a lack of growth and soaring debt which will be hard to pay off by certain nations, the EUR in fact has continued to do relatively well and stands near its one month highs. Trading the Single Currency via short-term daily gyrations has become a question of trend and where the confidence game will traverse. Psychologically the ECB has created an air of stability. They have been able to show that the Central Bank is going to do its best to stand behind the currency. But a couple of long-term questions remain a nightmare. Where is growth going to come from as many European nations remain stagnant at best and depression like at worst? One last question, if in fact the ECB has been able to brush concerns to the side in the short-term and has achieved an equilibrium for the EUR, at what price is the EUR too expensive, not only for traders, but for European businesses looking to export goods?
The global stock markets continue to feed off of cheap money. As bond rates in the perceived healthier economic environments continue to see shrinking yields, investors are left with little choice except to chance the money they manage into corporate shares or keep it on the sideline. It is a question of preservation versus risk in order to maintain current values or to try and profit for their clients. And in most cases it is the job of investment houses to make money for their clients via pension funds or individually managed accounts and not to merely keep it locked away in a vault. Stock prices have gone up this week as the forex markets have shown a taste for risk too.
The U.S. will release Housing Starts and Crude Oil Inventories data in a few hours time. Tonight (or in the morning if you are in Asia) the Chinese will release their GDP statistics. Tomorrow will be an interesting day as a 10-Y Spanish Bond Auction begins. Also the European Summit will begin, but word is that there are unlikely to be many tangible results except for smiles and handshakes (and that will be enough for most) as Greece and Spain continue to negotiate for better options regarding austerity measures and new payouts. It has been rumored that another summit will be announced to follow which will in essence allow the leaders to kick the can down the block once more. Again, it is not about concrete solutions, for the time being it remains a battle of keeping attention diverted from the real problems that mathematically are almost impossible to solve if real growth is not achieved in the European Union.
Which gets us back to the initial point, short-term the EUR is more than tradable if trends and sound risk management are part of the game plan. However, long-term the EUR has like many of its contemporary cohorts (the U.S. and parts of Asia) – problems which can not be solved so easily. What the ECB and Federal Reserve have essentially done is make paper money a Ponzi scheme regarding its stated value – it is a game of confidence. When the value of money comes under real questions in the heat of battle, unfortunately many may find out the emperor wears no clothes. And when the great confidence game is lost it will be hard assets and timely investing into nations of stability that will allow some to remain tranquil in the storm.