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23rd February - Europe looks excited

23 February 2015

TECHNICALS:

Daily Euro Ex-UK ETF chart

See how the  IEUX etf is out-perfoming all other major markets :  even the £ hedged Japan ETF has been thrown into the shade by the recent price action.

Weekly Europe x UK  chart

And the structure of the market looks particularly exciting: the Old end of 2007 high of 2201 has been closed above  -  confirming the completion of a reverse Head and Shoulders pattern formed since the beginning of the year.

The minimum target from that pattern? About 2500 – a further move of about 9%.

FUNDAMENTALS:

The last minute agreement on Friday between Greece and her creditors, caused a strong rally in equity markets.

Following a period of weeks when Greece threatened to tear up its bailout agreement and end austerity, potentially leading to Greece leaving the Euro and leading to bankruptcies, the four month extension agreement was a cause for relief in the markets and among policy makers.

On the face of it the new tough-talking Greek government elected only a few short weeks ago seems to have caved in to conservative German demands, but has it?

The briefing from fellow Euro zone finance ministers is that Greece didn’t win any new concessions, but is that a defeat for the Greek government?

Had there been no agreement, the current arrangements were set to lapse on February 28, Greece would probably have run out of cash, the Banks subjected to a run on deposits resulting in a Banking system collapse.

So although Greece may not have won any new concessions, she has won time and that doesn’t sound like too much of a defeat. Politically we cannot conceive the Government of Greece, voted in with a strong mandate to end the long damaging period of austerity would cave in so easily.

So we judge this is a time buying exercise.

What happens next?

The Greek government has four months to come up with a plan that will satisfy her creditors and at the same time end austerity and allow the economy space to grow. If that proves impossible due to German intransigence, then perhaps Greece should call Germany’s bluff.

If Greece leaves the Euro, yes it will be difficult, but how many other countries in recent years have defaulted and bounced back with lenders once again willing to buy their debt?

More importantly, Germany benefits enormously from the Euro zone. Far from being a complete dead weight, it has given the German economy exceptionally low interest rates and a currency much weaker than a national currency would be if the D Mark was still in circulation.

So how eager would the Germans be to see Greece leave the Euro and risk a further unravelling of the Euro zone? We judge a deal will be done that eases the burden on Greece.

For now markets can refocus on the other big Euro zone event, the start of the ECB’s QE program and we judge equity markets, especially the German DAX will extend their rally.

In summary, the Greek drama has seen the close of Act One.

There will be more to come over the coming months. 

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Next story:
26th February - Why is Dollar Euro so dull?

Previous story:
19th Feb - CRB Index Rebounding Off Support

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