E.U. Is The Epicenter

Caution began to make its way into the broad markets on Tuesday as Forex began to consolidate largely. The EUR, GBP, and AUD mostly sat in rather range bound motions as investors began to position themselves for today’s ‘promised’ outcome from the European summit which will address the financial crisis. The outcome from the E.U. meetings remains unclear and Wall Street sank yesterday under some of this pressure. The U.S. also saw a poor CB Consumer Confidence survey as it turned in a mark of 39.8 compared to an anticipated reading of 46.1. The number confirmed that the American public is anything but satisfied with current economic conditions in the States. To top it off the S&P/CS Composite -20 HPI also showed another decline, meaning that the housing market remains locked in a depression. While the U.S. will release its Core Durable Goods Orders statistics today, Europe will certainly be the epicenter of attention.

The last three weeks have produced rallies in riskier asset classes. Equity markets, particularly on Wall Street, have done well. The EUR, GBP, and AUD have all reached short term highs and Gold had settled into a consolidated mode. However signs of this dissipating occurred on Tuesday as Wall Street began to decline and Gold abruptly moved higher. The precious metal as of this morning is around 1712.00 USD and must be watched carefully over the next few days with large risk events on the horizon. The EUR has done remarkably well having gained steadily the past couple of weeks after being punished in August and September. Needless to say the EUR will be a key barometer of investor sentiment as the E.U. begins to make official statements today.

The question is how much clarity will be delivered today from the E.U. and not many know this answer. It is safe to say the E.U. will try desperately to put their best foot forward, but early signs indicate that Germany is not exactly comfortable with proposed amendments and that banking institutions are balking at what are seen as punitive measures which include massive ‘haircut’ proposals regarding debt holdings. In other words today’s E.U. summit might produce more questions than answers and if that becomes the scenario expect markets to punish ‘a lack of clarity’. The E.U. will try their best to produce a well worded guideline, but will they be able to really quantify the amount of real dollars that will be put forth to bolster its institutions, nobody seems to have this answer as of yet.

Tomorrow’s trading is likely to remain swift as the Americans release their Advance GDP numbers which will play into today’s market action which has a chance to become volatile. Therefore it is safe to say traders will need to remain highly alert to any gyrations. The question is how much investors priced in ‘good news’ into the EUR, GBP, and AUD and what will happen if disappointment comes down the pike. Obviously the question also must be asked about what will happen if the E.U. delivers what is seen by many as an impossible task. Can they actually bring forth a clear and quantified accounting showing timelines and full measures that will create stability for its financial institutions for the coming years? That is doubtful from this perspective given the recent history of the E.U. making promises and not delivering fully. Thus what is likely is an attempt to push the problems down the road for another day and another month.

And how will the broad markets react? For those with iron clad stomachs and proper risk management it may be possible to take advantage of bold ranges. If the E.U. disappoints the EUR is likely to find downward pressure eventually and the GBP and AUD would be likely to shadow the EUR centric tone. The next forty eight hours of trading will be interesting and traders will need to be at their best.