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For Euro The Trend is Down

Once again what was perceived to be an encouraging remedy offered by the ECB last week is muddled in political and financial theater, causing the Euro to reverse last week’s positive trend. This time Spain looks to be the culprit.  Further hindering the Euro was a release from Germany indicating that the Euro Zone’s strongest economy may be heading into recession.

The news from Spain was predictable.  But, the message from Germany may have far-reaching ramifications for the region.  September marks the fifth consecutive month that German business sentiment has trended down.  The lack of confidence in Germany increased investor concerns concerning a stalling global economy.

In Spain, Prime Minister Mariano Rajoy is holding firm that the request for bailout funding is not necessary at this time.  It is believed that the Prime Minister will eventually apply for rescue funds after a regional election to be held on October 21.  Spain’s resistance is puzzling because the country was active in pushing Ireland and Portugal to pursue a Euro Zone bailout deal.  Now, it is Ireland that is pushing Spain to apply and accept the bailout financing.

Countries like Ireland rely upon a stable euro to attract outside investment and are nervously awaiting Lisbon’s decision.  Rajoy became Prime Minister just nine months ago.  His policy is completely opposite from the posture of the previous administration. So, the message appears clear. If Rajoy applies for bailout funding, he will be voted out of office. Let’s be charitable and say that the Prime Minister is in over his head

In addition to Portugal and Ireland, France and Italy are also applying pressure to Spain to proceed immediately.  However, the Euro Zone’s paymaster, Germany, is not in any hurry to support a request from Lisbon.  France and Italy need investor confidence in the Euro zone to stabilize so as to reduce their yields on their bonds.

In Germany, 2013 is a critical election year.  Public sentiment opposes underwriting bailout funding for other Euro Zone states.  Germany’s financial leaders do not view the European Financial Stability Facility (DFSF) and the European Stability Mechanism (ESM) as a means for governments to obtain inexpensive funding for governmental operations.

For Germany and Austria, it is clear that the use of these funds is a last resort. They are determined to not make it easy for Euro zone members to access these funds until every other resource has been exhausted.  Austrian finance minister stated that position last week saying, “The goal is not to get as many countries as possible under the program, but to keep them stable enough so that they do not need a program.”

Last week, the ECB said it would buy potentially unlimited quantities of short-term bonds in secondary markets.  However for the ECB to act, nations must apply for Euro Zone bailout funds and agree to implement related fiscal and economic reforms which are monitored by an international supervisory committee.  Rajoy feels the austerity conditions accompanying bailout funding are prohibitive and contrary to any opportunity Spain would have to grow its economy.  Spain is scheduled to submit a new package of reforms at the end of this week at the same time that the prime minister submits his 2013 Budget.

Disappointing economic new-age from Germany

The lack of business confidence in Germany spread quickly across global equity and currency markets.  The immediate future does not look good for the Euro which made a pretty spectacular rally last week.

On the US equity front, the S&P 500 had climbed 6% on expectations that central banks would provide strong stimulus to assist the recovery. It appears that the ECB initiative is temporarily blocked.  Investors are also concerned about the Federal Reserve’s newest buying spree.  Many analysts thought the Fed would implement more direct investment to reduce the unemployment rate.

On Monday, the Euro hit a session low old 1.289 USB, its lowest valuation since September 13th.  Against the yen, the Euro traded at 100.54 yen, down 0.8%.  It is clear that the rally in the Euro spawned by the ECB’s new policy has already lost its momentum.

Don’t overlook Greece

Greece has made some progress in managing its debt by implementing some pretty severe austerity programs.  The question is whether the EU/IMF report on November 6 will qualify the country for the next round of bailout funding.

Greece has steadfastly insisted that they will meet the EU/IMF qualifications to entitle the country to the next round of funding.  Most analysts do not see how Greece can meet the overwhelming conditions.

Greece will not only have to trim programs, but will also have to show some growth.  There is no indication that Greece, which has been in and out of recession five times in the last seven years, can possibly generate growth.  This means that stronger austerity cuts are the only way for the country to meet its deadline terms.

So, where does that leave investors?  Investors seem to be attracted to reliable U.S. stock performers.  With U.S. bonds at historically low rates, certain US equity opportunities are in strong demand.  And, of course, if the dollar weakens, the U.S. may well increase its export trade.  Stay tuned, there’s a lot to come before the end of the week.

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