Euro Cash Turns Markets into Euro Trash

by Paul Springer

So far this week, news from Europe has been driving the direction for U.S. equity markets. It’s usually the other way around. Trading has been reflective of the classic good-news-and-bad-news situation.

Stocks don’t necessarily plunge, but are weak and biased to the downside. Traders know that the bad news – at best – will linger for some time as investors worry that Greek sovereign debt problems would destroy the Euro or even the European Union itself.

Indeed, news from Greece just keeps getting worse. Bloomberg has reported that markets reflect a 98% chance that Greece will default on its debt in the next few years. But market players are looking for something in the much nearer future:

“Everyone’s pricing in a pretty near-term default and I think it’ll be a hard event,” said Peter Tchir, founder of hedge fund TF Market Advisors in New York. “Clearly this austerity plan is not working.”

It’s probably not a coincidence that the S&P choked a bit around the same time as that report hit the wires.

In response (anticipation?), the Euro fell to a seven-month low against the U.S. Dollar, AP reports.

The idea of a global economy once sounded pleasant, but the interconnectedness in Europe continues to pose problems. “French banks reportedly have some of the biggest exposure to Greece and could be vulnerable if the government defaults on its debt,” according to Reuters, which says people are buying Euro puts at a time when the Euro hit a ten-year low against the Yen. Several French banks were downgraded by Moody’s Wednesday.

EU critic Dennis Gartman says the Union is pretty nearly kaput at this point, according to The Wall Street Journal’s reading of his investment letter. Here’s what Gartman is saying now:

This thing that was European Monetary… and eventually European political… Union was a chimera. A falsehood . . . The end-game is upon us. The experiment, from our perspective, is over, and all that is left is the final recognition of that fact.

A report from MarketWatch says some investors are planning for the Euro to exist stage left — and using various rationales for Euro pessimism. One factor is a spike in the Euro/Dollar exchange rate volatility. Another is less well known:

More worrying, a wonky gauge called a “risk reversal,” which tracks investor demand for bearish put options on the euro/dollar rate relative to bullish calls, is at its most extreme level since the euro was created in 1999. This suggests investors are scrambling to buy puts that grant the right to sell the euro at a predetermined rate in the future to avoid losing money if the euro collapses.

While it’s premature to write an epitaph for the Euro or the EU, there is little in the way of obvious solutions to economic problems in the U.S. or Europe.

A BNY ConvergEx Group managing director told The Economic Times that it was not so much the Europe problem as the lack of a solution that’s sucking life out of markets: “We have no timeline about when we could get any clarity, and financials will continue to be the most egregiously hit in this environment.”

Meanwhile, as the economic masters of the universe wonk away about Europe’s sovereign debt difficulties, this is one crisis that is also hitting at the guy on the street who might normally remain oblivious to economic currents.

This is certainly the case in Greece, whose new austerity plan brings layoffs, new taxes, and wealth cuts seemingly directed at higher income earners.

The austerity is already threatening to trickle down, according to The Sydney Morning Herald:

Though designed to target mainly high earners, the tariff could further anger the crisis-weary middle class and pose political risks for the socialist government, which repeatedly has pledged to protect households from being hurt by further austerity measures.

People are rioting in Greece over the new austerity plan, and photos in The Herald and elsewhere paint a grim picture.

In the U.S., we’re fortunate the market’s difficulties since last spring have played out in the indexes and not the streets. Some other nations aren’t having it so lucky.

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