The equity markets consolidated substantially over the last weeks as various types of risk crept into the market derailing a seemingly unstoppable advance which lifted investment spirits over the last 9 months. Originally it was only Greece which spooked the markets. However in a very nice well coordinated fashion market participants discovered numerous candidates which could follow suit into Greece’s foot steps. The abbreviation for all those countries is PIGS: Portugal, Italy, Greece and Spain. It is well documented that all those countries have budget problems and especially in the case of Spain and Portugal the property market is extremely distressed. What is new about this story?
Virtually nothing. It was all known to the market for a long while it just need an additional spark to ignite the fire. But the fire can spread fast and uncontrolled. If Portugal and Ireland would fall pry to the continued worry about debt levels and budget deficits investors will look to sell Euro and look for better solutions. US-Dollar and Japanese Yen could strengthen against the Euro. Though both countries have an investment grade rating and there is no major market talk about debt and credit problems. However, both countries are having as large problems as any of the PIGS. Debt and budget deficits in both countries could rival the European culprits. Thus a move into US-Dollar or Yen could be only a relative decision. Investors chose what is still healthy in a relatively rotten bunch of apples in a basket.
Investors can already count large gains in the US-Dollar. The move was strong and vicious as just couple of weeks ago most commentators focused on the weak state of US economy and budget problems. The sentiment for US-Dollar was at multiyear low. Now it appears that the crowd sentiment can swing fast and furious to the other extreme. the sentiment for Euro is already very negative approaching fast the levels seen just before US-Dollar was trying to strengthen to above 1.25 to the Euro about one year ago. Sentiment is a very crude timing indicator but at extremes it should warn risk conscious investors that the easy gains in a given assets may have been registered already and some type of reversal may be due. Watch for sentiment to darken before a reversal can be envisage.