A Weakening Euro on the Heels of a Greek Bailout came as a big Surprise to the Stock Market
May 4 - MM
The Dow Jones is down over 260 points today after it increased by 150 points yesterday? Today’s decline is due to the Euro’s inability to rally against the U.S. Dollar on the news that the European Community’s central bankers and economic ministers over the past weekend came up with a solution to prevent a debt default by Greece. The stock market did not react yesterday because much of the currency markets were closed on Monday because most of Europe was observing the May 1st or May Day holiday.
Instead of the Euro advancing against the Dollar today it collapsed to a new 52 week low versus the U.S. Dollar. A weakening Euro on the heels of a solution to Greece’s woes is a big SURPRISE to most investors who had anticipated that exactly the opposite would happen. The Euro’s price action speaks volumes for the lack of confidence in the world’s second largest currency. I believe that the lack of confidence in the Euro is because the European Central Bank (ECB) announced that it would be accepting Greek Bonds as collateral even though Greece sovereign debt had recently been downgraded by Standard & Poors and Moodys to junk status. That any Central bank would make loans on such junk collateral is a significant warning signal.
Those who have not read my May 2009 post “Safe Haven Status of U.S. Delays Recovery”should do so. I have been predicting that the biggest problem that the Obama Administration and world leaders will soon face is the appreciation of the U.S. Dollar against the Euro to new all time highs. Should that happen the cost of U.S. produced goods or exports to foreigners would soar and the U.S. economy would enter into a severe and long lasting recession.
Another thing that investors should read is my February 10, 2010 post “The Damage to the Euro has been Done” at BearMarketTracker.com. The following is an excerpt:
“Investors should pay very close attention to the collapsing Euro. Since its inception in 1999 it has a history of volatility or price swings, which have pre-empted the peaks and troughs of the major U.S. stock market indices including the S&P 500 and the Dow 30 Industrials. The Euro’s steep declines versus the Dollar in the late summer of 2008 and winter of 2009, precipitated the crashes in the U.S. stock market which occurred in the Fall of 2008, and the Spring of 2009, respectively. Even the bursting of the dot com bubble in April of 2000 and the ensuing economic downturn in the U.S. can be blamed on a steep 15% decline in the Euro which began on January 3, 2000. These sell offs in U.S. stocks, which followed sudden and sharp upturns of the U.S. Dollar, were sparked by professional investors and analysts. They knew all too well that the sudden spikes in the Dollar meant that the prices of U.S. manufactured goods would have to go up and demand for them by foreigners would go down with the likely result being a U.S. economic downturn or a recession.
Sharp and sudden declines in the Euro have proven to be accurate leading indicators of market U.S. market crashes and economic downturns since the Euro’s inception in 1999. My argument is that it was the sharp decline of the Euro, which began in August of 2008, from off of its all time highs against the U.S. Dollar, which ignited the crash of the U.S. stock market in September of 2008. My belief is that it was the increased volatility of the Euro and its sharp and sudden sell off and not the sub prime debt problem, which caused the failures of Lehman, Merrill Lynch and AIG. The flight to safety in the Dollar and the increasing probability of a U.S. recession drove investors to dump the shares of all U.S. financial companies.”
For more on why I believe that the U.S. is currently in a Super Bear market and why I expect it to last until 2015 at the earliest go to www.bearmarkettracker.com. Investors should remain cautious and have their assets in 80% cash or equivalents such as short term U.S. treasury securities.
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