Friday, January 29, 2010

Concerns Over Greece and the Euro Trade


The crisis over debt in Greece is not going away. The euro currency (vs. USD above) has become a nice sentiment indicator for that concern.

As long as we see broad selling of the euro and a flight to the relative safety of USD, I'm wary of the market's long side.

My concern is that stocks just aren't pricing in enough volatility given what the currency markets are telling us.
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2 comments:

Jorge said...

Dr. Steenbarger,

Good observation, but keep in mind that the correlation between the euro and the S&P is at its lowest in months, partly due to yes, Greece, but thanks also to the improved US economy and thus higher likelihood of interest rates increases. Notice also the weakness in the British pound, which is not affected by Greece.

Best trading,

Jorge

OKL said...

My view thus far after the strong selling in late Oct09;

- Equities and broad markets strengthen, but volume and internals never quite corroborated it

- Dec09; EUR got crushed and broke the trendline @ 1.485, but no reaction in "risk assets"... at the same time, treasuries-yen started to weaken (yields moving higher) and oil shoots to $80; which i was thinking probably negated the EUR weakness abit, but well aware that if TNX shoots higher >4%, could stop equities dead in its tracks.

- Jan09; Treasuries-yen start to strengthen and EUR continues to weaken... Crude oil sells off from >$83... EEM starts to look shaky... US Equities-HYG gets crushed on high volume-broad selling... Copper getting hammered senseless this week...

I just contrast this little pullback across the markets to the panic selloffs back in 2002 and 2008 where assets decline ALL at once... but this one smells like purposeful selling, where asset classes begin to drop one by one... "Let's just take some profits, sit on our hands and see what happens with all that is coming"

Just sharing my thoughts, but I think this decline is gaining strength to the downside, while the "safe haven" asset classes continue to "press the ball".

Fundamental wise...

- China tightening (slowing growth)
- EU sovereign risks (default risks)
- Iran/Iraq/Afghanistan (commodity risks)
- Fed unwinding programs in March (what happens then?)
- CRE risks and option ARMs (bank risks)
- Deficit risks (debt rollover issue)

News Wise...

- Bank bashing
- 2010 mid-term elections