Market Overview

Euro Suffers Heavy Losses as Debt Focus Moves to Italy

Share:

The euro suffered heavy losses on Monday, as debt fears moved from Greece to Italy, the Eurozone's third largest economy. At the moment, the euro lost 0.764% of its value to trade around $1.4155. At the same time, the euro suffered smaller losses against the Japanese yen, falling 0.625% to ¥114.32.

The euro was forced into retreat by speculations that Europe's leaders are worried Italy might soon become new Greece. Reuters reports that Italy would be on an agenda in today's emergency meeting of the Eurozone financial elite. Traders started to sell off Italian assets on Friday, which increased Italy's costs of borrowing and sent stocks of Italy's banks tumbling. Italy has the highest debt to GDP ratio in the Eurozone, after Greece, and many analysts are worried the Mediterranean giant will soon find it hard to finance its massive debt.

Analysts' fears are strengthened by an ongoing political crisis in the country. Silvio Berlusconi, the country's longest serving prime minister since WWII, is quickly losing popularity following a series of scandals ranging from corruption to the use of underage prostitutes. Most recently, Berlusconi's company Fininvest was fined €560 million for bribery charges. With pressure on him to resign mounting and his popularity faltering, the ageing prime minister has announced he will not seek re-election in 2013.

Silvio Berlusconi has been at a center of law violations controversies for decades. So far, he has always maintained his innocence. At the same time, however, the billionaire prime minister used his time in office to implement laws which helped him fight criminal charges against him. With 2013 looking to be the year when Berlusconi leaves high politics, some analysts might contend that in the meantime, PM Berlusconi will be more likely to pursue an agenda of judicial reform, aimed at shielding him from persecution when he retires, than unpopular, if necessary economic reforms. With a weak prime minister beset by its own personal problems, it seems the number of analysts thinking Italy has the knowledge and the will to find a solution to its debt problems is rapidly dwindling.

The Europeans did not forget about Greece. It is becoming obvious to virtually everyone that the current path of resolving the Greek crisis is not working. As a result, the Europeans are looking for new ways to restore market confidence in Greece. France's complicated plan, which included rolling-over Greek debt by banks, seems to be off the table. Instead, the Europeans are likely to focus on Germany's plan to swap current bonds with longer-maturing ones. More importantly, it seems the Europeans are seriously considering allowing Athens to default on some of its debt. This position was previously rejected out of fears that investors might be worried more partial defaults might follow in Ireland, Spain, Portugal and other debt-ridden countries on the Eurozone periphery, making it close to impossible for these countries to raise new funds on open markets.

The latest shift in the Eurozone policies can be interpreted as a sign that the Europeans simply do not know what to do anymore. The previous attempts to resolve the Greek crisis and bring back market confidence have failed. New proposals, which included shifting some of the burden on the private sector, have been treated hostilely by the credit rating agencies, which said they will view these attempts as selective defaults. Selective default in Greece, however, would most likely start a domino effect, forcing other debt-ridden countries to default on parts of their debt.

Debt worries dominated traders' imagination today, so a strong rebound in France's industrial output did little to support the embattled European currency. According to the Insee data, France's industrial output rebounded 2% in May, compared to the previous month, much above -0.5% recorded in April and 0.5% expected by most analysts. At the same time, the French manufacturing output rose 1.5%.

France is the Eurozone's second largest economy. At the same time, throughout this crisis, France has been one of the main locomotives driving the European recovery. Strong improvement in the country's economic performance will provide relief to some investors, as it makes it more likely that the strength of the French economy might provide some steam for the faltering economies on the Eurozone periphery.

ACTION ITEMS:

Bullish:
Traders who believe that the Europeans will be unable to find a resolution to the debt crisis in the Eurozone periphery, which should send the euro tumbling against major currencies, might want to consider the following trades:

  • ETFS Short Euro Long US Dollar ETC (Sterling) ETF (SEUP) is a short play on the euro. SEUP will rise if the euro depreciates.
  • Market Vectors Double Short Euro ETN (NYSE: DRR) is another short play on the euro. DRR will rise more than SEUP, however, should the euro depreciate.

Bearish:
Traders who believe that there is enough strength in the Eurozone center to help the peripheral economies make a full recovery, which should provide significant headwind for the euro, may consider an alternate positions:

  • EUR/USD Exchange Rate ETN (NYSE: ERO) is s long play on the euro. ERO will rise if the euro appreciates.
  • ProShares UltraShort Euro ETF (NYSE: EUO) is another long play on the euro. EUO will rise more than ERO, however, should the euro appreciate.

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.

 

Related Articles (DRR + ERO)

View Comments and Join the Discussion!

Posted-In: France GermanyLong Ideas News Forex Economics Trading Ideas ETFs

Don't Miss Any Updates!
News Directly in Your Inbox
Subscribe to:
Benzinga Premarket Activity
Get pre-market outlook, mid-day update and after-market roundup emails in your inbox.
Market in 5 Minutes
Everything you need to know about the market - quick & easy.
Daily Analyst Rating
A summary of each day’s top rating changes from sell-side analysts on the street.
Fintech Focus
A daily collection of all things fintech, interesting developments and market updates.
Thank You

Thank you for subscribing! If you have any questions feel free to call us at 1-877-440-ZING or email us at vipaccounts@benzinga.com