Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
US Economy Has Been in an Economic Depression Since 2008 - 22nd Oct 21
Extreme Ratios Point to Gold and Silver Price Readjustments - 22nd Oct 21
Bitcoin $100K or Ethereum $10K—which happens first? - 22nd Oct 21
This Isn’t Sci-Fi: How AI Is About To Disrupt This $11 Trillion Industry - 22nd Oct 21
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

QE2's Done, Now Euro and European Debt Crisis To Take Center Stage

Currencies / Euro Nov 09, 2010 - 04:55 AM GMT

By: Dian_L_Chu

Currencies

Diamond Rated - Best Financial Markets Analysis ArticleOver the past month or so, world`s focus, currency markets in particular, has been centered mainly on the U.S. over QE2, the November elections, and the Job`s Report. As such, there have been some interesting headlines coming out of Europe that went quietly under the radar as Wall Street became infatuated with their own bullish sentiment.

Now, with QE2 and mid-term election pretty much behind us, guess where the market’s attention will shift to next?


The euro, which has been strengthening across the board for a while, was noticeably weaker last week considering the bullish sentiment, which really bolsters the European currency during ebullient US and world market breakout moves to the upside.

Trichet’s Telegraph

There were also telltale clues from the press conference of ECB President Jean-Claude Trichet last Thursday after ECB’s decision to leave interest rates unchanged. The press conference was filled with numerous questions regarding the record high Irish bond spread, and the ever widening bond spread of the other highly indebted EU members--Greece, Spain and Portugal.

That basically telegraphed the European debt crisis will start to take center stage once again.

Spread at Euro Life Time High

Sure enough, on Monday, the Portuguese and Irish government bond spread hit their highest in the euro's lifetime with Irish 10-year bond and the German Bund widened to 557 basis points while the Portuguese 10-year versus the Bund expanded to 450 bps. (see Bond Yield Chart)

In fact, the bond interest rate of Ireland, Portugal and Spain, have been rising ever since German Chancellor Angela Merkel said any future EU bailouts is expected to come with new rules requiring bondholders to absorb some losses, which was further elaborated by German Finance Minister Wolfgang Schaeuble in a an interview with Der Spiegel.

Ireland & Portugal - The New Center of Crisis

Meanwhile, Greek bond had a little rally after the election poll, but that does not alter its ominous overall debt picture. Nevertheless, Greece is pretty much old news, and now it’s Ireland's and Portugal's turn to take a beating from the widespread investors skepticism.

Market players expect Portugal to issue up to 1.25 billion euros of five and ten-year bonds this week, while Ireland says it has sufficient cash until mid-2011 (such reassurance to bond buyers) and plans to resume bond auctions in January.

But with ECB seemingly the only major buyer of European bonds in recent weeks, and at such high yield levels, investors pretty much bet on both countries will eventually join Greece for a bailout by the EU and International Monetary Fund (IMF).

Head of the Debt Class

Of course, fresh deficit figures from Eurostat last month only add to the pessimism. According to Eurostat, Ireland’s budget deficit was the highest among EU members at 14.4 percent of GDP last year, ahead of Spain at 11.1 percent and Portugal at 9.3 percent. (By the way, the UK came in second to Ireland with a deficit of 11.4 percent of GDP.)

Debt Projection – Bad

The more eye-popping news is that Irish deficit is set to rise to an unprecedented 32 percent this year—a modern European record-- due to the one-off costs associated with the bank bailout.

The situation seems so dire that in an article in the Irish Times, the "Dr. Doom" of Ireland--University College Dublin economics Professor Morgan Kelly--concluded that

"We [Ireland] are no longer a sovereign nation in any meaningful sense of that term. From here on, for better or worse, we can only rely on the kindness of strangers."
The debt projection is even more depressing for Portugal and other EU peripheries (See Debt Projection Chart), whereas the UK debt outlook is not that rosy either.

Growth Forecast - Worse

While the US is depressed over its 9.6% unemployment rate, just imagine Spain`s 20.5% unemployment rate, not to mention the slower growth prospects (see Growth Forecast Chart) due to the implementation of numerous Austerity programs throughout European Union member states.

Something Bullish About The Dollar

In short, analysts may be inclined to be bearish on the US dollar due to Mr. Bernanke`s QE2 campaign. However, the European Union and namely the Euro currency may be much worse off than the US dollar, considering the US can actually still finance its debt at much lower rates right now.

Furthermore, the US only has ONE country to manage, whereas the European Union has 27 member states with 16 utilizing the Euro as a single currency, with the high powered Germany at one end of the fiscally responsible spectrum, and lowly Greece and Ireland at the other end. The GDP comparison chart here also bears a similar message.

Euro To Retrace

After the initial reaction regarding QE2 where the euro approached 1.43 on the Eeuro/Dollar currency cross, it is now hovering just above 1.38. It seems very likely that euro could break through the 1.38 level this or next week, and head much lower to around 1.35 over the next month on European debt concerns, which will be back on the front burner as markets focus away from the US and back on Europe.

The comparison is not a favorable one from a currency evaluation standpoint. What you have is a contest where you are trying to find the proverbial dog with the least flees on it, and at these levels, I am not sure the euro is the winner in this currency contest.

Remember, just this summer the euro was trading at 1.18 against the dollar, it has come a long way in a short time, and is probably due for a correction lower to the 1.30-1.35 range over the next 6 months. (See Euro Technical Chart)

Dian L. Chu, M.B.A., C.P.M. and Chartered Economist, is a market analyst and financial writer regularly contributing to Seeking Alpha, Zero Hedge, and other major investment websites. Ms. Chu has been syndicated to Reuters, USA Today, NPR, and BusinessWeek. She blogs at Economic Forecasts & Opinions.

© 2010 Copyright Dian L. Chu - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 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