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ETF Periscope: Upcoming EU Summit Will Set Tone for Wall Street’s Summer

Posted on the 25 June 2012 by Phil's Stock World @philstockworld

“Adopt the pace of nature: her secret is patience.” Ralph Waldo Emerson

ETF Periscope: Upcoming EU Summit Will Set Tone for Wall Street’s Summer
The leaders of the European Union will be gathering in Brussels later this week to address the continued downward spiral of the Eurozone. Judging by the high spikes in volatility levels that have played across the global markets this week, it would be safe to say that investors are largely unsure which direction those talks will take.

This is the fourth occasion EU leaders are convening a summit this year, and the stakes keep getting raised at each meeting. That’s because the solutions put forward always seem to fall short of investor concerns, though the shorter term fixes have so far managed to generate enough glue to hold the Eurozone together.

That may all be about to change.

To start, the news broke over the weekend that both Greece’s prime minister and finance minister might not make it to the scheduled summit due to ill health. That is certainly a hard thing to spin in a positive light, as one of the key points the EU leaders will be discussing is a new request by the Greek government to renegotiate the terms for the most recent bailout. For those with short-term memory loss, that’s the same one that was famously heralded back in February of this year as a flawed, but adequate, remedy.

Back then, EU leaders were maintaining, at least on the surface, a predominantly unified front in terms of Greece staying in the Eurozone. Compare that to the current situation, where details of contingency plans for a Greek exit are routinely to be found in statements by a wide swath of EU leaders and International Monetary Fund (IMF) executives.

Spain will remain front and center on the summit agenda as well. The results of the recent stress tests applied to Spanish banks revealed that about $80 billion in bailout funds would be required over the next two years to enable the country to handle possible “worst-case” scenarios. However, even that amount might not be adequate, according to the IMF, as that plan is designed to funnel money through the government rather than directly to the banks, and therefore fails to solve the underlying issues.

The need for a greater degree of “credit-sharing” is gravitating to the center of the conversation, one that finds Germany on one side, and the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) on the other. In other words, those who owe the most want a new paradigm out of their creditors. Germany’s citizens are, perhaps reasonably, balking at the premise. The degree of co-dependence of the Eurozone countries, however, is at such a high level that any predictions of what disengagement might actually look like are no better than guesses, as there is simply no good model to work from.

The uncertainty of the situation won’t go away, no matter what is the outcome of this next EU summit. Wall Street is not an admirer of uncertainty, but that may be all it has to look forward to for the duration of the summer, and probably well beyond that point.

What the Periscope Sees

It is possible that a rash of good domestic economic news will begin to emerge from this week’s myriad of government reports. It is also possible that the Fed may decide that it needs to inject a greater degree of liquidity into the system then Operation Twist is able to accomplish.

What is more likely, at least based on all the issues that remain to be solved if the Eurozone is to be considered stable, is that investors may retreat from equities and seek U.S. dollars. If this occurs, a short position on the Eurozone seems like one worth considering.

One ETF that would serve the purpose is FEZ (SPDR Dow Jones Euro STOXX 50 ETF), which tracks the DJ EURO STOXX 50 Index. This index

Captures about 60% of the underlying market capitalization of the DJ EURO STOXX Total Market Index. It is currently down over 8% YTD, and would be expected to fall sharply in the event of continued negative sentiment by investors towards the Eurozone situation.

By shorting the FEZ, one would be acquiring a position that takes advantage of a downtrend in the European equity market.

ETF Periscope

Full disclosure:  The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.

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