Four Plays On Europe’s Nuclear Option

As somewhat of a last resort to save the Euro and prevent another catastrophic economic event, the European Union, the International Monetary Fund (IMF) and other major Central Banks have implemented a $1 trillion emergency package.

This package consists of 440 billion Euros in guarantees from euro area states, 60 billion Euros in a European stabilization fund which can be drawn upon to provide aid to euro zone states, 250 billion Euros from the IMF, bond purchases and currency swap programs by the U.S. Federal Reserve and other Central Banks.  The plan has already gone into action; with all euro zone banks purchasing sovereign bonds in the open market, in particularly the PIIGS nations (Portugal, Italy, Ireland, Greece, and Spain).

The reaction to this measure was relatively drastic, as global markets soared.  The Dow Jones Industrial Average gained more than 400 points; the Euro gained nearly 3 percent in intraday trading; risk premiums on peripheral euro zone sovereign bonds plummeted; the price of insuring euro zone sovereign bonds against default declined and investors sold safe-haven debt and increased their appetite for risk, illustrated by a decline in German bund futures. 

This agreement, called “the nuclear option” ensures that all measures are being taken to stabilize the Euro and the euro zone, opening the possibility of opportunity in the following equities:

  • CurrencyShares Euro Trust (FXE), which closed at $127.51 on Monday.
  • SPDR Euro STOXX 50 (FEZ), which allocates nearly 19% of its asset base to the PIIGS.  FEZ closed at $35.10 on Monday gaining more than 10% over the day.
  • iShares MSCI EMU (EZU), which allocates nearly 15.4% of its assets to the PIIGS.  EZU gained nearly 10% on Monday closing at $32.52.
  • SPDR Barclays Capital International Treasury Bond (BWZ), which allocates 17.5% of its asset base to the PIGS.  The breakdown is as follows: Italy, 11.8%, Spain, 3.5%, Greece, 2.2%.  BWZ closed at $34.19 on Monday, adding nearly 1.6%.

Although this emergency financial package which includes stand by funds and loan guarantees seems like a good resolution, it will only be effective and sustainable if Europe’s weakest economies can manage their debt and the European Union can develop more coherent economic and fiscal policies to underpin the Euro.  

These forces, in addition to the volatility of the region, make it important to have an exit strategy which identifies specific price points at which an upward trend could come to an end in the mentioned equities. 

According to the latest data at www.SmartStops.net, an upward trend in the mentioned ETFs could come to an end at the following price points: FXE at $126.78; FEZ at $33.56; EZU at $31.05; BWZ at $32.86.  These price points change on a daily basis as market conditions fluctuate and are reflective of market volatility.  Updated data can be found at www.SmartStops.net.

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