Saving The Euro - Part 18

Rob's 18th guest post on Saving the Euro.

Missed Messages

The last week in the markets has been very interesting from a spectators view point.

Stock markets have rallied strongly – led by the banks – with Merkozy (that mutant being that has been created from the merging of Merkel and Sarkozy to become the voice of Europe) deciding for all the other nations in the Euro zone that they will become a more integrated fiscal, and by extension, political body. To do this they want to re-write the "Treaty" – a treaty is defined as "a formal agreement between two or more states in reference to peace, alliance, commerce".

Lovely sound bite, but how will they accomplish this – they effectively want to take away certain sovereign rights to manage a country's own economy, finances etc. and have them monitored and controlled by one central body?

I am not sure if that is covered by the term treaty, as if there is a substantial transfer of powers to Brussels, a number of EU members, including the UK, may have recourse to a referendum, and in the current climate of austerity, I think that there could be a chance that it won't get ratified at national levels.

In the UK, Cameron is definitely running scared, and is desperately sending out the message that any adjustments to the treaty will not be substantial and no more powers will be surrendered to Brussels, but that seems at odds with the comments from Merkozy outlining plans to re-write the whole thing, even if only for the core 17 members of the Euro zone itself.

As the old saying goes, "the devil is in the detail", and there is very little of that to be seen so far.

The stock market rally has eased off this morning – I admit that it could be short term profit taking, but FTSE really struggled yesterday to break 5,600, and is now slightly down on yesterday's high at 5.560.

My big concern is that the currency markets are singularly unimpressed.

Euro/$ is down at 1.3350 from last week's high of 1.3520.

GBP/$ is trading at 1.5600 from last week's highs of around 1.5750.

A small market fact that may bring this in to perspective – if you add up the total turnover in the global stock markets for one whole year, what does that equate to in global foreign exchange turnover?

1. 17 days
2. 34 days
3. 68 days
4. 136 days
5. 272 days
6. 544 days

The correct answer is just 17 days (a slightly old statistic, but it has not changed much in the interim).

So am I overly worried about what the stock market thinks?

A little perhaps, but not as much as I am worried about the Forex market – if you cannot get the currency traders on board, and they don't like what they see, read or hear, you are going to have one massive uphill struggle to make this plan succeed before they decide to tear the Euro apart.

As an example of the uncertainty within the market at the moment, ICAP – possibly the largest Forex broker in the world – has already been discussing with its clients (banks mainly) how to reintroduce the Greek Drachma in to the trading loop, and major Irish institutions have been told to come up with a contingency plan to cover themselves in the event that the Euro implodes.

S&P announced yesterday that 15 of the 17 Euro zone members were at risk of losing their top credit rating, especially if the Merkozy plan went through, as further integration would dilute their individual capital ratios.

Merkozy has come up with a plan, but there is a mountain to be climbed before it can be agreed, plus it needs more time to see if it then actually works.

I have said this before, traders hate uncertainty, and the longer they have to wait for results etc. the greater the chance is that they will simply get bored, fed up, whatever and choose the easy option.

The easy option is to sell every Euro they can lay their hands on – buy hard currencies like US$, Yen, Swiss Francs and even GBP, and keep selling until the Euro buckles and implodes – governments have very short memories, and forget that the Forex markets have an impressive track record of ignoring what governments might like or want, and simply forcing through change by sheer pressure.

Will be fun to see what the Year End brings.


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The author, Rob (not his real name), works in one of UK's largest charities.