Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Gold Bull Market Ultimate Upside Target - 17th Sep 19
Gold Spikes on the Saudi Oil Attacks: Can It Last? - 17th Sep 19
Stock Market VIX To Begin A New Uptrend and What it Means - 17th Sep 19
Philippines, China and US: Joint Exploration Vs Rearmament and Nuclear Weapons - 17th Sep 19
What Are The Real Upside Targets For Crude Oil Price Post Drone Attack? - 17th Sep 19
Curse of Technology Weapons - 17th Sep 19
Media Hypes Recession Whilst Trump Proposes a Tax on Savings - 17th Sep 19
Understanding Ways To Stretch Your Investments Further - 17th Sep 19
Trading Natural Gas As The Season Changes - 16th Sep 19
Cameco Crash, Uranium Sector Won’t Catch a break - 16th Sep 19
These Indicators Point to an Early 2020 Economic Downturn - 16th Sep 19
Gold When Global Insanity Prevails - 16th Sep 19
Stock Market Looking Toppy - 16th Sep 19
Is the Stocks Bull Market Nearing an End? - 16th Sep 19
US Stock Market Indexes Continue to Rally Within A Defined Range - 16th Sep 19
What If Gold Is NOT In A New Bull Market? - 16th Sep 19
A History Lesson For Pundits Who Don’t Believe Stocks Are Overvalued - 16th Sep 19
The Disconnect Between Millennials and Real Estate - 16th Sep 19
Tech Giants Will Crash in the Next Stock Market Downturn - 15th Sep 19
Will Draghi’s Swan Song Revive the Eurozone? And Gold? - 15th Sep 19
The Race to Depreciate Fiat Currencies Is Accelerating - 15th Sep 19
Can Crypto casino beat Hybrid casino - 15th Sep 19
British Pound GBP vs Brexit Chaos Timeline - 14th Sep 19
Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - 14th Sep 19
War Gaming the US-China Trade War - 14th Sep 19
Buying a Budgie, Parakeet for the First Time from a Pet Shop - Jollyes UK - 14th Sep 19
Crude Oil Price Setting Up For A Downside Price Rotation - 13th Sep 19
A “Looming” Recession Is a Gold Golden Opportunity - 13th Sep 19
Is 2019 Similar to 2007? What Does It Mean For Gold? - 13th Sep 19
How Did the Philippines Establish Itself as a World Leader in Call Centre Outsourcing? - 13th Sep 19
UK General Election Forecast 2019 - Betting Market Odds - 13th Sep 19
Energy Sector Reaches Key Low Point – Start Looking For The Next Move - 13th Sep 19
Weakening Shale Productivity "VERY Bullish" For Oil Prices - 13th Sep 19
Stock Market Dow to 38,000 by 2022 - 13th Sep 19 - readtheticker
Gold under NIRP? | Negative Interest Rates vs Bullion - 12th Sep 19
Land Rover Discovery Sport Brake Pads and Discs's Replace, Dealer Check and Cost - 12th Sep 19
Stock Market Crash Black Swan Event Set Up Sept 12th? - 12th Sep 19
Increased Pension Liabilities During the Coming Stock Market Crash - 12th Sep 19
Gold at Support: the Upcoming Move - 12th Sep 19
Precious Metals, US Dollar, Stocks – How It All Relates – Part II - 12th Sep 19
Boris Johnson's "Do or Die, Dead in a Ditch" Brexit Strategy - 11th Sep 19
Precious Metals, US Dollar: How It All Relates – Part I - 11th Sep 19
Bank of England’s Carney Delivers Dollar Shocker at Jackson Hole meeting - 11th Sep 19
Gold and Silver Wounded Animals, Indeed - 11th Sep 19
Boris Johnson a Crippled Prime Minister - 11th Sep 19
Gold Significant Correction Has Started - 11th Sep 19
Reasons To Follow Experienced Traders In Automated Trading - 11th Sep 19
Silver's Sharp Reaction Back - 11th Sep 19
2020 Will Be the Most Volatile Market Year in History - 11th Sep 19
Westminister BrExit Extreme Chaos Puts Britain into a Pre-Civil War State - 10th Sep 19
Gold to Correct as Stocks Rally - 10th Sep 19
Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - 10th Sep 19
Stock Market Sector Rotation Giving Mixed Signals About The Future - 10th Sep 19
The Online Gaming Industry is Going Up - 10th Sep 19

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Watch the Euro for Important Clues on Global Financial Markets

Currencies / Fiat Currency Apr 24, 2010 - 02:48 PM GMT

By: Bryan_Rich

Currencies

Best Financial Markets Analysis ArticleIf you’re looking for clues on where stocks, commodities and global economies are headed, you might be better served keeping a close eye on the euro, rather than on the incoming stream of corporate earnings reports.


That’s because the ongoing crisis in the euro zone, and the respective threat that Greece and the other weak spots in Europe are posing to the lifespan of the euro, has very significant implications for global markets.

I touched on this topic last week in my column, “How Greece Can Impact YOU!

I also said in that piece that, despite all of the crisis management tactics used by euro-zone officials, the situation in Greece was far from over.

And this past week, we’ve seen clear evidence of that.

Since the implications of this sovereign debt crisis have a broad reach, let’s take a closer look at how things are playing out in Europe.

Investors Voting with Their Feet

Two weeks ago many market participants happily accepted a proposed euro-zone/IMF rescue plan for Greece — one with aggressive numbers behind it — as a resolution to the euro’s problems. And those same participants likely viewed the euro as a bargain, snapping up the euro at $1.35 … 11 percent lower than the post-crisis highs of just five months ago.

As such, the result was a sharp rally in the euro.

But it was short-lived.

In fact, the knee-jerk recovery in entire “euro crisis trade,” has since fully reversedand then some.

Take a look at these three charts …

In the chart below, you can see how the initial jump in the euro was quickly reversed. And since then, the euro has traded to new 2010 lows.

Euro, 10 days Chart

This next chart compares German and Greek borrowing costs. As members of Europe’s Economic and Monetary Union, these two countries share a common currency and common monetary policy. So in theory, the cost of government borrowing should be the same.

Greek German Chart

But as you can certainly see, speculators and investors have been bailing on Greek bonds, driving up the spread between Greek yields (the white line) and German yields (the orange line) to 12-year highs. Thus making the Greek government’s ability to refinance debt nearly impossible!

Now that all of the cards are on the table, and the market vote has been one of “no confidence,” the attack is being levied on the other weak spots — especially Portugal.

This next chart of the sovereign debt credit default swap market measures the market’s appetite for insurance against a government default.

Govt Default Risk Chart

It’s certainly obvious the price of this insurance is being driven dramatically higher for those countries that represent the next likely dominos in line for Europe’s sovereign debt crisis.

These market reactions are clearly negative for the euro and negative for global economic stability, showing that …

Europe’s Sovereign Debt Crisis Is Fully Involved

Countries that have joined the euro currency have unique challenges when economic times are tough.

That’s because the monetary union in Europe consists of a common currency and a common monetary policy. But fiscal policy is determined by each individual country. And to patrol those fiscal decisions, the European Union established its Growth and Stability Pact that, among other things, sets two criteria for member countries:

1) Deficit spending cannot exceed three percent of GDP, and

2) Total government debt cannot exceed 60 percent of GDP.

As we well know, after a battle with global recession, those limits have been completely blown out of the water by many members of the euro monetary union.

So these problems aren’t new, they’re just coming to a head! And they aren’t going away anytime soon.

I’ve written several Money and Markets columns about the fallout in Europe and the growing risks of a contagion of sovereign debt fears. In fact, my first column this year was titled “Will the Euro Become the World’s Most Hated Currency for 2010?

And in recent months I’ve laid out even more of the story, including …

  • The structural flaws of the European monetary union and the threats those flaws represent to the lifespan of the euro,
  • The inability of the Emu to enforce fiscal constraints on euro members,
  • The irreparable damage to the credibility of the euro as a contending primary world reserve currency,
  • The vulnerability of a sovereign debt contagion within the euro zone and beyond,
  • And the teetering dominos that stand behind Greece as the next likely candidates … among which are the major advanced economies of the world.

And despite the many hailed resolutions that have been proclaimed in recent months to the problems in the Greek drama, I’ve explained why the potential outcomes facing the euro are “no-win.”

Here are two of the distinct possibilities I foresee:

Scenario 1— More handouts

A euro-zone bailout of a fellow member would be a breach of the guiding principles upon which the euro was built. It would create an irreparable moral hazard, remove incentives for fiscal responsibility and open the floodgates of other weak euro-zone countries to come looking for a bailout of their own.

Scenario 2— Euro collapses

On the other hand, a default in Greece would make a breakup of the euro highly probable. It would set off a calamity of sovereign debt fears and threaten the European banking system.

Both scenarios jeopardize the landscape of global economic stability and the 11-year old, single currency concept.

So keep a close eye on the euro and on the ongoing developments in Europe. They could provide important clues on what to expect from financial markets and the global economy going forward.

Regards,

Bryan

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules