Part 2 : Coming Week Market Movers & How To Profit
The following is a weekly strategy guide for traders and investors, covering coming week’s market movers and how to profit from them for traders of all major asset classes via both traditional instruments and binary options. Perfect for those seeking a summary look at likely coming week market movers and how to play them.
Greece Related Events: Political Will Cracking….
As noted in Part 1, there is increasing belief that a Greek default is becoming unavoidable. Complications are making the July 21 agreement look less and less likely. If this loss of faith hits critical mass, then no leader will want to risk being remembered as the fool who threw more money after a bad cause, and focus will shift from saving Greece to measures to minimize and control the fallout from the default.
We saw the start of such moves this week with announced German preparations to stabilise German banks in the event of a Greek default.
Meanwhile Greece has insisted on higher participation rates in the “voluntary” swaps of longer term debt discussed below, and Finland continues to seek cash collateral that Greece cannot afford to provide, if for no other reason that it would then have to provide similar collateral for a host of other nations. That would in turn consume the very cash Greece needs to survive and undermine the whole purpose of the bailout.
Greece could default in October unless it gets the next tranche of bailout funds. Here are the related events this week that influence the odds of that happening.
Or Is This All Just More Grandstanding Brinksmanship?
Germany cannot credibly threaten to withhold bailout cash from Greece unless it can at least pretend it’s prepared to endure the consequences. If it can’t, Greece can continue to hold the EU hostage as it points the default-contagion-catalyst gun at the EU’s heart. Thus no surprise Germany is telling about its plan B (no details, of course).
We suspect the positions noted may be more grandstanding for local consumption and negotiating ploys than actual positions on which the bailout could fail.
Why? Simply because at this stage a Greek default still is likely to cause the other GIIPS to be deemed equally bad credit risks and to lose access to credit markets, thus causing these nations to default. That in turn risks another “Lehman moment,” another global banking crisis as banks stop lending to each other on fear of which banks may now be a bad credit risk due to direct or indirect exposure to EU banks or US banks that insured GIIPS debt.
Either way, the following events promise enough drama send markets plunging on fear or soaring on euphoria after dodging yet another default bullet.
Of course the real danger with games of chicken is that even though everyone intended to pull back at the last minute something happens and WHAM, that last minute suddenly isn’t there, changes occur that require more than a last minute to resolve, or events block you’re planned escape.
What’s the likely winner in either case? See the conclusion below.
EU Dates To Watch
September 12: Two events
–Greece has been demanding about 90% private sector participation for “voluntary” bond swap activities proposed in the second Greek bailout, though according to Dow Jones it will accept ~75% participation rate. The deadline for participation was this past Friday Sept 9th. By early this week we’ll know how Greece responds to the likely 75% participation rate and see market reaction to that response.
–Results From G-7 Meeting of September 9-10, And Market Response: Not much anticipated as it’s the G-20 that packs more influence. Expect major decisions to wait until the next G-20 meeting.
September 14: Greece-Troika Talks Resume
Greece-Troika inspectors resume talks about whether Greece is fulfilling privatization and deficit cutting targets needed to both get the next trance of EU funding of ~ $ 11 bln AND to convince parliaments that are debating the next bailout to approve it.
Dutch parliament to vote on expanding the EFSF, the EU bailout fund. Along with Finland, the Dutch too want collateral and have been among the most hostile to additional Greek aid, with multiple senior Dutch officials expressing wishes to see Greece out of the EU.
September 15: EU Interim Report On Inflation and GDP For Leading 7 Members
Any surprises in the report could influence ECB monetary policy and attitudes towards further aid to Greece and other GIIPS nations
September 16-7: EU FinMin Meeting To Ratify Second Greek Bailout Package
The results will likely determine whether the bailout is likely to succeed in passing the various individual parliamentary votes later this month.
Top US Events
It’s as busy a US calendar as you get except for weeks with monthly US jobs reports. The docket includes retail sales, consumer and producer prices as well as the Empire State and Philly Fed manufacturing surveys. There’s also, the Treasury International Capital flow report along with the University of Michigan Consumer Sentiment index. With only 2 more weeks to go before the FOMC meeting, these reports take on added significance.
Markets will be scrutinizing next week’s reports closely to see if they give the Federal Reserve any new motivation to act quickly. If retail sales or inflationary pressures surprise to the downside, we expect investors to add to their pre-QE3 trades, which in turn might pressure the USD. Beware however, that if EU fear is rising, the USD is able to rise even in the face of increasing odds of QE 3 and its potentially long term devaluing effects on the USD.
Also, towards the end of September Congress must again pass a temporary extension given that it has not been able to agree on a budget for over 850 days. This could turn into yet another version of the debt ceiling battle and once again show that Washington is unable to reach decisive timely agreements needed to deal with its own deficit troubles. Thus if somehow the EU is quiet, we could see focus return to this issue. Heck, if nothing else this issue would provide a lot of big players to profit handsomely by selling the EURUSD positions they’ve taken from eager retail traders shorting the EURUSD over the past 2 weeks.
Conclusions: What To Do?
For all the questions, the USD, JPY and Gold seem the likely winners in most scenarios.
If default or higher default risk, funds flow out of the EUR into other safe haven currencies or gold, still the ultimate currency hedge. The CHF has a solid underlying economy thus far but is gone as a safe haven for now because it is now tied to the EUR. While the JPY and USD have the liquidity to bear a share of safe haven flows too, neither currency is a compelling long term hold given the deep debt issues in their underlying economies. There are currencies with better underlying finances like the NOK, SEK, CAD, etc, but these lack the availability (liquidity) to absorb the demand like the USD and JPY, which will be the destination of choice for those fleeing the EUR and CHF, warts and all.
Get Ready To Go Long European Bank Stocks?
The EU may have a matter of days or weeks at most to avoid a banking and economic crisis. Europe doesn’t have the time to solve the debt or growth troubles of Greece or the other GIIPS. Thus its first priority will be to restore stability or at least confidence in its banking system. Germany has already begun doing so with its leaking plans to support its banks on Friday. Expect more of this, and watch charts of the banks coming under official protection. Once those prices stabilise, it may be time to start taking long positions on these banks. Maybe.
By the way, IF the EU can somehow find a way to restore confidence via some kind of bank bailout system that allows their banking systems to survive, expect support for more bailouts to disappear. It’s the overall EU economy, and thus the big banks, that they’re really worried about.
DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE WOULDN’T BE TELLING YOU FOR FREE, NOW WOULD WE?
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