"It's like Déjà vu all over again", to quote the great Yogi Berra. Over the past couple of years, we have looked into the European Abyss, only to be pulled out of it as leaders from the continent continue to kick that can down the road just as far as they can.
In May & early June 2011, the SPDR S&P 500 ETF (NYSE: SPY) shed roughly 7% on worries that Greece may default on its debt, potentially leading to a contagion effect in the Eurozone, leading to surging interest rates on Euro-based debt. Of course, the ECB came to the rescue, restructuring Greece's debt and providing the country with the bail-out funds needed to finance its debt. With that, the markets temporarily put Greece and Europe on the back-burner and moved on - until November, at least.
In November, yields in Italian and Spanish bonds began spiking higher and Greece's stock market began to tumble. The trouble this time was two-fold. First, headlines out of the G20 were unfavorable towards Greece, indicating that bailout funds would be frozen until Prime Minister Papandreou's referendum is completed, and if the vote was no on the referendum, the result would have been Greece going bankrupt. There was also uncertainty within Italy's parliament as Prime Minister Berlusconi's resigned, opening up questions as to whether the country would still favor cost-cutting austerity measures. But, in early December, Italy unveiled a $40 billion austerity package, pleasing the markets, and once again, the ECB stepped in and bought more bad debt, helping to ease yields on Spanish and Italian debt.
And here we are again, in May 2012, staring at the possibility that Greece may default on its obligations and be forced to exit the Euro, possibly causing a ripple effect throughout Europe. Yields on sovereign debt are once again alarmingly high, financial stocks in the region have been pounded, and there have been reports about massive withdrawals of cash from Greek banks. Consequently, the Global FTSE Greece ETF (NYSE: GREK) was crushed, stumbling 40% since mid-March. U.S. stocks have suffered a fairly moderate set-back - at least compared to European stocks - but this week, have been on the rebound.
Why? Well, part of it is simply due to an oversold technical bounce, but the other reason is that at the G8 meetings this past weekend, there was a consensus among members that they would like Greece to remain in the Euro. Notably, Germany's Merkel, who has been adamant that Greece must be held accountable and pursue meaningful austerity measures, allegedly stated that she was in agreement with France and Italy that strategies for growth are necessary. This suggests that the hardline stance against Greece has softened, and the once-believed imminent exit of Greece may not be in the cards - at least not yet. Furthermore, there have been more rumblings of the creation of a Euro-bond from the ECB, with the funds going to troubled economies and banking systems.
So, with these headlines easing some fears, we may have just gone through our latest Euro-scare, setting up the potential for a meaningful rebound in the stock market and the Euro. What is clear is that European leaders are hell-bent on kicking the can down the road as long as they can, and are willing to continue to pile up debts in order to do so. In the long-run, its attempt to keep a common-currency could very well be a disastrous stance to take because of the divergence in economic strength among the countries, and the differing political views. But, in the short-run, the markets rejoice at the thought of paying the piper later - even if the pay-out is much more painful.
With that in mind, I am looking for a meaningful bounce in the stock market, and the Euro, which typically move in unison. A simple way to pair this scenario would be to buy the technology-laded PowerShares QQQ ETF (NASDAQ: QQQ) and the CurrencyShares Euro Trust (NYSE: FXE).
Or, alternatively, one could pick up the PowerShares US Dollar Bearish ETF (NYSE: UDN), as the Euro gains some lost ground against the dollar.