Market Overview

Bank Nationalization Propells Market Higher

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The euro rallied on Monday morning, as the EUR/USD pair spiked above the 1.36 level. News from Europe may have been the primary driving catalyst behind the move.

Dexia, one of the continent's largest banks, was partly nationalized on Monday. The country of Belgium agreed to purchase the bank's consumer credit unit. The Belgian government will pay 4 billion euros.

Dexia does not trade on major American exchanges, however, when the stock reopened for trading in Europe on Monday, shares plummeted over 30%.

Further, the U.S. dollar index dropped over 1.40% on Monday, while gold and silver traded slightly higher.

Has Europe finally found the answer to its problems?

On October 23rd, the European Union will hold a summit on the fate of the euro. The summit was initially planned for next week, but has been delayed in order to allow additional time for Germany and France to come to agreeable terms on bank recapitalization.

Apparently, market participants were emboldened by the news, as the Dow Jones Industrial Average traded nearly 200 points higher on Monday in early trading.

Still, does the move make sense fundamentally?

Earlier in the summer, stress tests conducted on European financials found Dexia to be one of the safer banks. If Dexia had to be nationalized, what does that say about other banks that were found to be less safe?

Further, on Friday, ratings agency Fitch had downgraded Spain and Italy while Moody's cut Italy's rating and said it may cut Belgium's rating in the future.

Given that Moody's cited a possible need to support Belgian financial institutions in its note on the possibility of ratings cut, that downgrade of Belgium may be assumed to be forthcoming.

Still, it seems obvious at this point that European leaders understand the full consequences of a major financial failure in the Eurozone. With the nationalization of Dexia, the precedent may have been set—no major European financial institutions may be allowed to fail.

ACTION ITEMS:

Bullish:
Traders who believe that the euro situation is on the path to a solution might want to consider the following trades:

  • Buy the euro. The currency has been battered by speculation that the EU could face significant financial pressure going forward. If Europe's problems are solved, the currency could bounce back.
  • Sell the Swiss franc. Despite its recent depreciation, the franc has benefitted from pressure in the Eurozone. If those forces disappear, the franc could trade lower.

Bearish:
Traders who believe that the rally over Belgian's nationalization will be short-lived may consider an alternate positions:

  • Buy the U.S. dollar. The dollar has continued to maintain its safe-haven status, and if Europe trades lower, investors may flock to the greenback once more.
  • Short the financials. Dexia traded lower even with nationalization, and other banks may follow a similar pattern.
  • Sell gold. Further financial fallout in Europe could prove to be deflationary—that may hurt the positions of those holding gold long on a possible inflation play.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

 

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