Perparing for the break up of the eurozone?

15 December 2011  •  Source: Simon Denham, Capital Spreads

Yesterday’s sell off indicated that investors are getting more and more nervous about the state of affairs in the eurozone. The fact that equity markets haven’t sold off further and that they are bouncing in early trading so far this morning comes as a bit of a surprise. Despite all of the efforts being made by European leaders, a possible breakup of the eurozone is becoming more and more likely. Signs that people are preparing for such a break up are already being seen as money presses for individual currencies such as the Drachma and even Deutsche Mark are ready to go at a moment’s notice and the world’s biggest inter-dealer broker has been testing its execution systems for currency deals in the event of anyone exiting the eurozone.

As a result the euro has been taking a pounding, most literally too as sterling look increasingly like more of a safe haven than many other currencies. GBP/EUR has been heading back towards 1.2000, but just this morning is running out of steam and the interest on UK gilts continues to head lower as investors buy up UK government bonds as a safety precaution. This once again indicates the faith the market has in the coalition’s deficit reduction plans, even if they are going slightly off target due to the lack of growth.

Even though the European debt crisis has dominated financial markets throughout 2011 and that seems to be all this column has been writing about for the last 12 months, there seems to be little prospect of that changing into the New Year!

As mentioned the FTSE is in bounce mode this morning and as we are now in the middle of December this tends to be the time that the bullishness in the run up to Christmas really gets going. However, for the index to get back into positive territory for the month it has to climb another 90 points from its current price of 5415.

UK retail sales will be closely watched today and already we’ve had some German PMI data that has come out much better than expected, giving equities this little early boost. There’s also lots of US economic data around and after lunchtime with the weekly initial jobless claims, industrial production and then the Phili Fed.

With global equities dropping like a stone over concerns that a eurozone debt resolution was to be reached anytime soon, the euro was inevitably only going to go one way. The single currency dropped below the big psychological level of 1.30, which as we said a couple of days ago, was the low last January and subsequently the next downside target. The euro is pushing higher this morning to around 1.3030 against the dollar, but traders should treat with caution as we’re in a bear market and any upside is likely to be limited to the very short term.

Dragged down by the heavily slumping euro, investors saw gold drop to levels not seen since late September, breaking through the psychological level of 1600.0 and not stopping there as it carried on falling, ending the session down 57.4 bucks at 1573.7. The reason for the third bearish day in a row was the worsening state of the European economy, pushing traders into the safety of the US dollar and out of commodities. A few months back, risk adverse market participants would turn to gold as a hedge against turmoil, but the tables have surely turned and now any sign of a downturn and the yellow brick is dumped. The next test is 1532.0, which will be the lowest level seen since early July, but at time of writing, the price is shying away from this level and is trading up at 1584.9.

As with gold, crude fell victim to the bears yesterday with investors finding sanctuary in the US dollar. The decision from OPEC to raise their output ceiling to 30 million barrels didn’t help the situation either, nor the US Department of Energy showing a bigger than expected build in gasoline stocks. At time of writing, black gold is trying to rectify some of the damage and is trading up at 105.54.

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