Market Overview

How to Profit from Central Banks' Move to Prevent Banking Crisis


The markets have responded favorably after five of the world's most important central banks announced a joint effort to provide the banking sector with additional liquidity.

As the talk of a Greek default increases, there has been growing concern that Europe's banks might stop loaning to each other, which could create a short term funding crisis. The US Federal Reserve, the European Central Bank, the Bank of Japan, the Bank of England, and the Swiss National Bank will provide the banking sector with three tranches of loans in October, November and December to address the funding concerns.

There's no question that a default by Greece could have catastrophic consequences and the latest move by the central banks to ensure that the banking system maintains liquidity is just the latest move by financial leaders to make sure that the international financial system avoids disaster. Other recent moves have included the European Central Bank's decision to buy Italian bonds, troubled Eurozone countries like Greece and Italy passing austerity measures and Chinese officials somewhat ambiguous statements that they are willing to help Europe through its crisis.

With so much international effort being devoted to keeping the troubled Eurozone countries afloat, Greece might actually be able to avoid a default. If Greece manages to avoid a default, the situation in Europe would look much brighter because if the Eurozone's most troubled country gets through the current financial crisis, other countries like Italy and Spain should make it too.

Europe's financial sector is the most obvious beneficiary of the central banks' move to inject more liquidity into the banking sector. After seeing share prices drop significantly this week as rumors of a French liquidity crisis circulated, investors in Europe's financial stocks will applaud the central banks' decision. The iShares MSCI Europe Financials (Nasdaq: EUFN) ETF and European bank stocks like Deutsche Bank (NYSE: DB) and National Bank of Greece (NYSE: NBG) are worth considering because if the central banks are successful in their efforts, European financial stocks could be among the biggest stock market gainers.

Investors who see this most recent central bank intervention as a sign that that the international community won't allow Greece to default might want consider investing in the CurrencyShares Euro Trust (NYSE: FXE) ETFs. If Greece manages to continue paying its debts without interruption, it could signal that the euro currency will survive.

If the troubled Eurozone countries get through the crisis, they could finally start focusing on Growth. If Europe avoids financial collapse, demand could start climbing as consumers start spending again. If this happens ETFs like the iShares S&P Europe 350 Index Fund (NYSE: IEV) and the United States Oil Fund (NYSE: USO) could post impressive gains as Europe's economic prospects improve and the price of oil climbs in anticipation of increased demand.

Asia's export-driven economies will also have a lot to gain if Greece avoids default. Asian markets climb and fall when major economic news comes out of Europe and America and the biggest news in the financial world is Greece and the Eurozone. Most of the news out of Europe has been negative for more than a year. If there is sustained positive news coming from Europe, like Greece avoid default and bond yields falling, then the Asian stock markets could be set to soar and ETFs like the iShares MSCI Hong Kong Index Fund (NYSE: EWH), the iShares MSCI South Korea Index Fund (NYSE: EWY) and the iShares MSCI Japan Index Fund (NYSEArca: EWJ) would move higher with them.

Other investors might not be convinced that the Eurozone is about to experience a financial turnaround. Much of the positive news that comes out of Europe relates to short term fixes like central bank intervention or the possibility of Eurobonds being issued. These are fixes that address the symptom and not the disease and there's only so much good they can do when austerity measures aimed at addressing the long term problems are currently driving countries into recession.

Skeptics may want to continue moving funds in to non euro currencies like the Swiss franc, the Japanese yen or even the US dollar through ETFs like the CurrencyShares Swiss Franc Trust (NYSE: FXF), the CurrencyShares Japanese Yen trust (NYSE: FXY) and the PowerShares DB US Dollar Index Bullish (NYSE: UUP). Another option would be to move funds into commodities like gold and silver through the SPDR Gold Trust (NYSE: GLD) and the iShares Silver Trust (NYSE: SLV) ETFs.

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