Another Greek Debt Meeting, Another Bernanke Speech: Do They Matter?

Includes: FXE, UDN, UUP
by: Ralph Shell

Once again the euro finance ministers have assembled for another meeting in Brussels to discuss the Greek bail out. By now it should be obvious that austerity with higher taxes, and reduced government expenditures is an economic prescription that has killed the patient. As the economy shrivels, so do tax receipts, and further austerity is then demanded by the Troika.

The Greek unemployment statistics illustrate what a miserable failure the plan has been. Total unemployment was up to 25.4% and youth unemployment had soared to 58%. Greek public debt in 2013 is now estimated to be 180% of GDP.

The Greeks have been pleading for easier terms. Most of the private bond holders have had their claims written off, so the remaining debt is held by the European Central Bank and other EU institutions. The ECB has agreed to extending the debt to GDP target until 2022, however, the IMF, a supplier of bail out funds, disagrees.

The issue is no longer the welfare of the Greeks, Perhaps it never was, but rather the welfare and pay back to the public lending institutions. Will the ECB get more than the IMF? And how will the profits from the distressed bond purchased made by the ECB be divided?

Typically the euro market rallies going into EU Summit or Finance Minister's Meetings. The rally continues when the politicians emerge and inform the press what wonderful progress has been made. This puts pressure on shorts and the rally can continue, but the allure fades.

The meeting comes when Fed Chairman Bernanke is scheduled to give a speech which will perhaps outline future plans. There has been speculation that "Operation Twist," will be discontinued. This program was designed to bring long-term rates down, and give the housing market a boost. Today the US housing starts report showed the highest rate in more than four years, so Bernanke can claim success.

There are rumors that the current program to purchase $40B of mortgage backed securities will continue, and another program, to purchase Treasuries and add them to the Fed's loan portfolio, will commence. If that should happen, combined with some post summit happy talk, a further rally in the euro (EURUSD, FXE, UUP) could easily develop.

The denouement for this potential trade comes on a major holiday in the US. If a market is depleted of some traders, and actively traded equity and bond markets, a little news can go a long way. Currently the euro has rallied to the top side of 1.28 and is resting around the 200 day SMA. In a thin market a run to the 1.30 area might be possible. Longer term we think the euro zone has some major problems. The last thing they need is a stronger currency when entering another recession. Try the short side on a strong rally toward the 1.30 handle. As always watch your stops.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.