In last week’s Trading Tutors Newsletter, we looked at the great European debacle and the fallout that has reverberated throughout markets across the globe. The bad news is that there is likely to be more. It has become clear that Greece is in no position to continue churning through funds and growing its deficit and is on a collision course to exit the European Union. The only clear solution is to let nature take its course. Thisis going to hurt markets around the globe and does not auger well for its already shaky neighbours Portugal and Spain.
The good news is global markets have had plenty of time to prepare for such a situation. Right now, markets are factoring in the inherent risk of what a Greek collapse would mean for global assets and the international business environment. This risk, which has seen the ASX 200 shed 9.5% of its value in less than 30 days, is a stark reminder that all is not rosy in the sovereign debt arena.
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The Greek wounds have been open for too long and there is no quick-fix for their soaring debt. Government bond yields continue to climb, confidence continues to wane and businesses lack the funding needed to generate export production. No one wants to hold Greek debt which, in itself, poses a major problem. European bank earnings (particularly in France) have suffered in the past year – in most cases not due to poor local performance but to write-downs of Greek debt. You see, even if Greece avoids ejection from the Eurozone, the likelihood of lenders recovering the existing debt is slim. Just how much of this toxic Greek debt global banks still hold is largely unknown but even this is not the biggest fear of all.
The real worry is contagion. If Greece should fall, what happens to Ireland, Portugal and Spain? Although not nearly as debt-laden as Greece, Portugal and Ireland are both experiencing sky-rocketing bond yields, a measure of risk versus reward. Just how much should an investor be rewarded for holding government bonds? In all investments, returns are dictated by the associated risk.
If Greece were to fall over, attention would turn to the next flailing countries. Weighing down the Eurozone is not a role any country wants to play, nor is it an action fellow Euorozone countries would look upon kindly. Should Greece experience further turmoil, Spain and Portugal will need to take strong measures to show they have the ability, confidence and will-power to make major strides in a national bid for economic recovery. Greece has already been on the receiving end of more than $169 billion in its second bailout. It’s unlikely this generosity will be repeated for the next stricken country.
What about the dollar?
In May, the Australian dollar slipped beneath parity for the first time in 2012. It has remained below parity any change in the near term seems unlikely, thanks largely to continued fears out of the Eurozone. Whatever one’s thoughts on the merits of the US dollar as a safe-haven currency, it is blatantly clear that holders of foreign currency flock to the shelter of the greenback at the first signs of global or European uncertainty. With the Global Financial Crisis and the soaring debt levels of America, many speculated whether the US dominance as the global currency of choice would be toppled. It’s not that easy. US dollars are still the basis for trading commodities, they are still used as a store of value next to other safe havens such as gold and that is a situation which would take years (and most likely decades) to change.
One positive side-effect of the fall in global equities is the range of trading opportunities that are presenting. Foreign exchange has become the world’s most liquid market, which is little wonder as opportunities arise regardless of the health of the global economy.
An integrated analysis also proving valuable, with a number of short opportunities continuing to present themselves, particularly in stocks vulnerable to falling European demand or Australian dollar weakness.The likes of Billabong (ASX:BBG) and Leighton Holdings (ASX:LEI) are prime examples.
Whatever your taste in markets, this is an exciting time. Evolving times require evolving measures. Maybe it’s time you looked at your portfolio to reassess its resistance to European fallout. On the other hand, if May was your month, then 2012 could well be your year!
Stay Ahead of The Game,