Are We Turning Overly Bearish Over Europe?

With the endgame in Europe over Greece in sight, are the markets overly worried about a possible euro breakup following Athens’ exit? Karen Olney, head of thematic equity strategy at UBS AG certainly doesn’t think so.

Europe still provides tremendous value and global investors have not capitulated yet though there are specific calendar risks involved (e.g. – Greece election on June 17).  The S&P is down about 7 percent from its recent peaks, which indicates investors haven’t capitulated over a possible euro break up. Other indicators such as put-to-call ratio, bull minus bear and the volatility index reading doesn’t suggest a bear run, though some parts pockets in Europe may have witnessed them.

As far as flight of capital is concerned where investors start to withdraw money from the banks in the peripheral region and deposit them at the stronger core countries, the European Central Bank may have to come out with some kind of deposit guarantee scheme to restore depositor’s confidence. Personally, she doesn’t think that Greece is going to go out of the Euro and would rather continue with the reforms process.

When we get over the crisis eventually, Europe will present value propositions as the US goes to polls and things become a little uncertain till the election results are out. The G8 summit currently underway in Camp David may seem some kind of consensus over watering down the austerity measures as both British Prime Minister David Cameron and French President Francois Hollande have advocated for higher spending to boost growth.

President Obama wants to add jobs as well. Hence there can be some kind of concerted global effort by the central bankers to ease the current liquidity position that will stimulate business lending. German Chancellor Angela Merkel may have to agree to go slow on austerity and shift the focus on growth instead. You can watch the video here.

While it’s an intererestinng point of view, I don’t agree with some of it. Europe’s problems are not one of liquidity but of insolvency, and they have the power to derail not only global economic activity but also global stock markets. While every world leader wants growth at all costs, it may just not be as simple as it sounds.

With the central banks having enaged in reckless stimumation and consequently market manipulation, there will be unintended consequences which are not clearly identifiable. JPM’s recent trading loss maybe just the beginning of the unraveling.

In the end, it’s impossible to arrive at any conclusion using the fundamentals that are available, so make the market trend your friend. Whether we go up or down, the closing price every day is only thing that is real in this surreal world. Use my recommende exit strategy, which at least gives you a rational way to deal with the future unknown unintended consequences.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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