With all eyes on Greece, article upon article has been written about the positions taken by both the Germans and the Greeks. Economic commentators have not wasted any time in outlining the potential impact of Greece exiting Europe. They have also expounded their thoughts on the potential impact if Greece remains in Europe. No matter what happens, we can find an opinion on how the markets might be affected.
Some are saying that it might lead to a break-up of the Euro, with each country having to return to their original “home” currency. Others are saying that it might create a “two tier Euro”, where you have a strong Euro made up of the north-western member states, and a weaker Euro made up of Greece, Italy, Spain, Portugal and Ireland.
If either of these eventualities were to play out, a degree of debt forgiveness is almost inescapable. There would be no confidence in a weaker currency, whether it is the Greek Drachma (and similar) or an inferior Euro, if those who were dependent upon it were overburdened with debt. There would simply be no way for those countries to function.
The feeling remains that an agreement of some description is the most likely outcome – even if it is postponed for a few months.
With regard to our opinion on what will most likely happen, we at the Academy of Financial Trading, are not concerned about “opinion”. We look at the only element in trading which matters – the price. We can see market participants opinions being played out through the price action of the bond markets in particular, but also in the Euro related currency markets, and in the Eurozone indices and equities.
As confidence in an agreement increases, the German bond market sells off, and the Euro strengthens along with the European indices and equities. As confidence erodes, capital tends to flow back into the German bond market, the Euro weakens, as do the relevant indices and equities.
The price is the ultimate commentator!