Taking the Pulse of European Anxiety

by: Bill Luby

Investors who are attempting to get a sense of the magnitude of anxiety about the economic problems in Greece have a multitude of ways in which to measure how markets are evaluating the situation. Perhaps the most direct approach is with Greece credit default swaps, but the sovereign credit information available to retail investors through firms such as Markit is neither timely or comprehensive.

The euro is another excellent proxy for sentiment about Greece and the rest of the so-called PIIGS (Portugal, Italy, Ireland, Greece and Spain), though once again many U.S. retail investors do not have much in the way of background and experience when it comes to foreign currency.

My recommendation is to watch the iShares MSCI Spain Index ETF, EWP. This is a reasonably liquid ETF that is appropriate as a market barometer and/or trading vehicle. The chart below shows the performance of EWP going back to June 2009. After breaking recent technical support at 47.50, this ETF has been subject to intense selling pressure and after a large gap down this morning is currently trading down about 7% on the day.

Watch the euro, watch Spain, watch the large European banks, and if you can get your hands on some good credit default swap data, use a healthy dose of that to take the temperature of the European markets.

The situation in Greece is very different than that in Dubai. Whether that is a good or a bad thing remains to be seen. (Click to enlarge)

[source: FreeStockCharts.com]

short EWP at time of writing

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