Greece And Now Puerto Rico Mean Haircuts Aplenty

June 29, 2015 - 3:56pm

 by Gary Wagner

When the euro began to tumble earlier today on the news out of Greece, the Swiss thought and thought as euro-investors streamed into the franc. Then the Swiss National Bank sold its own currency to make it less attractive as a haven.

In an unexpected turnaround of play, the euro is up against the U.S. dollar. The dollar is also down against the yen – even more than it is compared to the euro. (Dollar down 0.75% in afternoon trading for the euro, 1.15% again the yen.)

This seems to be a vote of confidence for the euro, which had been slipping against the dollar. The coherence suggests that the European Monetary Union, as distinct from the EU proper, will survive a Greek exit should it come to pass. Some experts are pointing to money movement into the German Bund as more evidence. But that is a vanilla safe-haven move as is a parallel move into U.S. treasuries.

The dollar drop helped push gold up moderately to strongly. It did not help out crude oil prices.

On the equities side, the DAX is down a stunning 3.5% on the day while the French CAC is down 3.75%. London’s FTSE was down a shade under 2%.

The U.S. stock indexes got away comparatively easy. The Dow is down 1.3%, S&P 500 1.42% and the NASDAQ is down 1.6%.

The real hurt dance went on in Shanghai, which was again down significantly today, 3.3%. The Nikkei and Hong Kong were also down sharply, the former by 2.9%, the latter by 2.6%. Shanghai is especially daunting because the Chinese central bank said it was lowering interest rates. The bank didn’t come out and say this, but it is aimed at stabilizing the falling stock markets there.

However, panic selling is already active on the playing field and more importantly it may very well be lodged in the imagination of the small investor who is ready to take his or her losses and go home. The Shanghai is off 1130 points from its high only twenty-one days ago, a decline of more than 20%.

Elsewhere, crude oil is down although it is now trading up off three-week lows.

West Texas Intermediate and Brent North Sea are both off around 2% in mid-afternoon action.

Also coming onto the radar are the difficulties that Puerto Rico is facing in the form of its own debt crisis. The U.S. island commonwealth owes as much as $75 billion dollars in obligations. That’s roughly $21,000 per capita. Its governor has made it painfully clear that the country can’t pay back its debt and has hinted that investors should be ready to take the proverbial haircut.

Of course Puerto Rico is not nearly as bad off as Greece, which in aggregate owes $396 billion. That comes out to $36,000 per capita.

Either way, we will have some high drama on the frontiers of finance in the next few weeks and months.

Plenty of barbers’ chairs. No waiting.  Wishing you as always, good trading,

Gary S. Wagner - Executive Producer

Gold Forecast: Proper Action

This morning we issued a buy reccomendation.

Maintain long gold @ 1178.50

Maintain stop @ 1161

Gold Market Forecast

Gold traded roughly $11 higher in trading overseas yesterday, and at the time of this writing has given back roughly half of those gains closing just off the lows of the day roughly at 1178 -1179. With an utter meltdown in the global equities markets, the Dow Jones industrial average closing off 350 points, the recent gains we have seen in gold could have been much higher.

However, the current crisis in Greece is far from over and it seems more and more unlikely that we will see a constructive resolution unfold. It seems highly likely if not inevitable that the $1.7 billion interest payment due to the IMF will not be paid.

There is also a higher probability that Greece will leave the European Monetary Union than there was on Friday. How this current crisis unfolds is anybody’s guess, and anybody who believes he or she has a real handle on how this will all play out must be psychic.

Trending Markets: Proper Action

Last week (Tuesday) we sent out a special trade alert recommending initiating short positions in the euro. The euro was trading approximately at 111.75 at the time of the sell.

Maintain current short euro @111.65.

Maintain current protective stop above today’s high of 113.47.

Trending Markets Forecast

To say that we had extreme volatility and dynamic range in the euro today would be a drastic understatement. In fact, we have not seen this much volatility in the euro currency since 2008. Obviously the debt crisis in Greece has come no closer to a resolution that on Friday. The interest payment due to the IMF tomorrow of 1.7 billion is still in play, although extremely unlikely to be met.

The most dramatic aspect of today’s trading was the extreme and quick recovery of the euro. Opening in Europe dramatically lower, and in fact trading to a low of 109.38, traders quickly drove the value higher, so it is now trading positive on the day.

What does this dramatic recovery say?  One possibility is the current belief that the European Union will do just fine without Greece; in fact, it might do better without Greece. Considering that the Greek economy accounts for roughly 2% of the euro zone’s GDP, not much would be lost should they exit the European Union.

We are left with another game of kick the can down the road, as if Sunday’s referendum and vote in Greece has any real intrinsic meaning at all.