4 Big Questions to Consider as the Greece Economy Meets its Fate
June, 2012, marks another epic battle for the future of Europe.
Last week the world remembered the Allied invasion known as D-Day that began at 0630 on June 6, 1944, when the largest amphibious invasion in history came ashore on the beaches of Normandy.
Last week also marked another chapter in the ongoing battle for the financial security of Europe as Spain reached out for international aid for its troubled banks. This week brings us “G-Day,” Greece Day, as on Sunday, June 17th, the Greek electorate might well decide not only Greece’s future but the future of the Euro, as well. While today’s battle pales in comparison to the Battle of Normandy in which more than 200,000 Allied soldiers were lost, the future of Europe once again hangs on the outcome of these significant events.
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On My Wall Street Radar
For the week, major U.S. stock indexes recorded gains with the Dow Jones Industrial Average (NYSEARCA:DIA) adding 3.6%, the S&P 500 (NYSEARCA:SPY) gaining 3.7% and the Nasdaq Composite (NYSEARCA:QQQ) climbing 4%.
The point and figure chart above shows how last week’s rally took the S&P 500 (NYSEARCA:SPY) back to significant resistance levels at the 1325-1330 level. Support lies in the 1270 region, a break below which would indicate the resumption of the recent down trend, so we find ourselves in a tight trading range of roughly 4% as investors weigh the threats and opportunities in today’s volatile markets.
The index remains on a “sell” signal with a down side price objective of 1180.
The Economic View From 35,000 Feet
Spain dominated the headlines last week as the country’s banks headed towards failure and were finally “rescued” before the weekend with a $125 billion bailout from the European Union. Its stock market rebounded with the iShares MSCI Spain ETF (NYSEARCA:EWP) up sharply on hopes of a successful bailout of its banks.
Germany’s index enjoyed a more modest rebound for the week with iSharesMSCI Germany ETF (NYSEARCA:EWG) moving higher after a month of steady decline, but the Eurodollar (NYSEARCA:FXE) fell on Friday to $1.2517 as futures traders put on record levels of short bets against the common currency.
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While the recent developments regarding Spain could buy the Euro Zone some time, significant questions and ramifications swirl around global financial markets. Questions and concerns include:
1. Now that Spain received a “no strings attached” line of credit or bailout, will Greece and Ireland want the same deal? Apparently so, as European news agencies already reported such developments in Ireland while Greece’s leading political parties battle over their opposing views in the final run up to Sunday’s elections. One can only speculate about what kind of moral hazard this leads to for the European Union and how it will affect the future of the Euro.
2. Where will the money come from? No one seems sure as the funds could come from either the European Financial Stability Fund, (EFSF) the temporary bailout fund, or the European Stability Mechanism (NYSE:ESM) the permanent facility due to commence operations in July. The interesting part of this is that the EFSF has only around 500 billion Euros and the ESM has yet to be ratified by Germany and so officially doesn’t yet even exist.
3. What will happen to Spain’s borrowing costs for its sovereign debt? If the country can’t afford to recapitalize its banks without outside help, one can only wonder how it will be able to finance the much larger sums of its government bonds? Another questions is where will Spanish bond holders wind up in the creditors’ queue should the country eventually default. If private holders are now in line for a “haircut,” as they well might be, appetite for Spanish debt could quickly evaporate on international markets.
4. In the rolling disaster that is Europe, how long will it take for Italy to come under the spotlight as its finances are also in shambles? Italy is the big elephant in the room as its the 4th largest economy in Europe and 7th largest in the world.
G-Day is coming and, along with Spain and Italy, sets the stage for a volatile week ahead.
In other, less dramatic, news last week, the Peoples Bank of China and Royal Bank of Australia cut interest rates in response to slowing economic activity in Asia while the U.S. ISM services index took an unexpected bounce higher with a print of 53.7, managing to stay above the 50 level that is the boundary between expansion and contraction.
In Europe, retail sales and Italy’s PMI took larger than expected drops, along with factory orders in Germany, while Chinese PMI services index fell as the dragon’s economy continues to cool.
Next week brings significant economic news in the areas of retail sales, producer and consumer prices, jobs, Empire State Manufacturing, Industrial production and consumer confidence.
Bottom line: This week’s deal on Spain might buy Europe some time, but maybe just seven more days as “G-Day” approaches. Any day now, global investors could start mimicking Tom Cruise in “Jerry Maguire” as they observe current events and start chanting, “show me the money!”
John Nyaradi is the author of The ETF Investing Premium Newsletter.