Europe: double or quits…

Europe, it appears, is reaching its denouement. Whilst the new Governments of Greece and Italy will bring some reassurance, my belief is that the damage is done and we will see a double dip recession. Without wishing to be a doom and gloom merchant, it is remarkable that so many had assumed everything was going to be ok, even when we knew over a year ago how bad everything was with Greece, Ireland, Portugal, Italy and Spain…

Many supposed that Europe was simply too big to fall, and to a certain extent, they were right. However, that was always underpinned by the assumption that the larger northern European nations, namely France and Germany, teamed with the IMF, would just keep bailing out the weaker nations. This is all very well, until those nations or global monetary funds fall into difficulty themselves, thus turning to their own fiscal woes…after all, charity begins at home.

With Italy soon to be under new leadership, it may allow some breathing space to its current debt woes, but the problem has just not gone away. Things are not much better closer to home either. It was only two months ago when the Bank of England thought 2012 would yield 2.1% in economic growth, yet a few weeks later many forecasters are set nearer 1%; forcing the Bank to revisit its own forecasts this week.

Our professional client base is seeking to profit from the Eurozone fallout, mainly via the FX markets. The continuing weakness of the euro has finally brought some attention to the pound, which has until now been just an understudy to the US dollar. Although the UK is on the fringe of continental Europe and therefore directly affected as a result, it is surprising that the pound has not shown relative strength against the euro. The GBP/EUR pair has been predominantly trading in the 1.10 to 1.20 range for the last year, with momentary blips beyond. Recently, however, it has attracted interest from professional traders who have built long Sterling, short Euro positions, driving the GBP/EUR pair up to 1.17. This momentum may test the 1.20 level, a breach of which will have commentators talking 1.30 as the next stop. It is tempting to assume that interest in our currency is a good thing, but the impact of this is that exports become less attractive. This double edged sword is fine when economies are booming, but not so when it’s hard to make ends meet.

Although the bond markets are a tempting play for professional traders, their interest is normally reserved for changes in the interest rate cycle; however a change in the cycle, i.e. interest rates rising again, now seems a way off with ‘double dip’ taking centre stage again; so unless you are trading sovereign debt, which is definitely not a product for the risk averse investor, then primary focus remains on the currency markets.

Within our clients base trading outside the FX market, the consensus is that equity markets should be lower, but patience is required. As quiet markets tend to drift higher our professional clients tend to place stop loss limits a healthy distance away.

Gold has lost its shine, as far as interest amongst the professional traders is concerned, as the volatility has faded following the assumption that inflation may well be topping out.

In the midst of this turbulent economic storm we are at least granted one ray of sunshine. Eventually the Eurozone crisis will reach its peak, whether by organic default or never-ending intervention, at which point the global economy will build on it’s more solid but transparent foundations leading to a long period of growth and prosperity… not a matter of if, but just a matter of when…

About Simon Brown
Simon Brown has over 20 years experience trading Derivatives on everything from Gold, FTSE to Dollar/Pound. Simon has lectured in Trading Psychology, Strategy and Technical Analysis, in addition to regular appearances on CNBC television. He is now Managing Director of ProSpreads.

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