EU summit optimism won’t last for long

 
Philip Salter
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FOREX conditions are choppy for euro traders, with yesterday’s moves indicative of the jittery markets. Upon the news that the Ecofin conference won’t take place, euro-dollar quickly dropped 0.6 per cent. Twitter feeds across the world were swamped with presumptions that the full emergency heads-of-government summit was also cancelled. Euro-dollar rebounded, as it became clear that this wasn’t the case. This drop shows what political failure today will do to the single currency and expectations remain high that today’s solution will be significant. This is unlikely.

HOPE OVER EXPERIENCE
In the topsy-turvy world of the euro crisis, hope springs eternal. Kathleen Brooks of Forex.com says the markets are still counting down to the conclusion of today’s EU summit and the announcement of a package of “goodies” from Europe’s high command. She notes that markets expect “a confirmation of the bank re-capitalisation plan worth €108bn at least, Greek haircuts up to 60 per cent of net asset value, an enlargement of the EFSF to €1trillion and agreement and harmony from all Eurozone leaders and a commitment to implement these changes quickly.” Let’s hope Santa Claus is feeling generous.

Excepting yesterday’s intraday panic, euro-dollar has been trading around $1.39, as market participants wait for today’s announcement. In fact, “market commentary is for the most part upbeat,” says Alpari’s George Tchetvertakov. He notes that risk tolerance has been rising and pushing emerging market currencies higher. However, Tchetvertakov warns: “The long wait for good news and the strong expectation of a silver bullet solution may result in investors being underwhelmed once an announcement is made.”

There are plenty of hurdles to jump. From the July agreement, it took until earlier this month for the now redundant 21 per cent agreement on a Greek haircut to be agreed, notes CMC’s Michael Hewson. Agreeing on 60 per cent won’t be easy – the Institute of International Finance, which represents 450 of the world’s largest institutions, is pushing for 40 per cent. Brooks says “the stage is set for a clash between lawmakers and bankers when it comes to private sector involvement.”

Chancellor Angela Merkel will also likely present her €1trillion plan to increase the EFSF to the Bundestag today. Brooks explains: “Since the plan can’t go ahead without German backing, this vote is absolutely crucial.” Carl Astorri of Coutts thinks “if the EFSF is increased in size either by using leverage or accounting tricks, such as those used in the US mortgage market prior to the financial crisis, then any initial positive market response is likely to prove short lived.”

Businesses are starting to doubt the euro. Polling from an Investec briefing shows that 53 per cent of UK senior executives expect the euro will be down against sterling in the next twelve months, with only 3.3 per cent expecting it to be up (30 per cent thought it would be around the same level and 13.3 per cent said they had no idea). While those admitting ignorance are arguably closest to the truth, it is a bad sign that business confidence is turning against the single currency. Speaking at the event, Sir Howard Davies, formerly of the Bank of England and FSA said: “If Greece can be isolated from the rest of the Eurozone, the implications for UK companies and the wider economy should not be as damaging as some are predicting. Without ring-fencing Italy and Spain, the results could be catastrophic.” Italy is justifiably a major concern.

Many are calling on Germany to play banker to the Eurozone’s troubled nations. A glance at Italy’s mercurial Prime Minister Silvio Berlusconi makes it easy to sympathise with Angela Merkel’s hesitancy. The Italian government’s latest failure to reform the pension system is telling and these are testing times. Fabio Fois of Barclays Capital Research notes that €17bn of Italy’s debt is to be auctioned between today and Friday, and “much more worrisome, Italy could become the scapegoat for any underachievement of the EU meeting, with the effect of placing further unpleasant pressures on Italy’s shoulders.” Rome wasn’t built in a day, but it won’t take much longer to go the ways of Greece.

The graph (opposite page) shows the key Fibonacci targets and resistances. However, as Brooks says, yesterday’s price action illustrates how difficult it is to trade in these markets. Better to wait until success, or more likely failure, is confirmed. This is a slow motion currency crash.