Thoughts on the Euro zone bear squeeze

Recently I have been posting about the confliction between the liquidity which is providing the market with a ‘risk on’ theme vs the real fundamentals which should really be providing a ‘risk off’ idea. As I have said before, I think that the forceful liquidity being pumped into the system kicks the can down the road rather than actually tackling the fundamental problems. As central bank liquidity does nothing to deal with the deteriorating economic outlooks.  The fact that a solid peripheral bid is not decreasing a bid for safe haven investments backs up my view. This considered I expect a restoration of fundamental concerns in the peripherals and a return to the ‘risk off’ theme, the questions are: when will this happen? What will trigger it?

The problem is at the moment, is that it’s very hard to go against the grain. With the Eurostoxx up just under 10%, Dax up just over 15% and the eur/usd up just under 5% from the 2012 lows. I suspect that most ‘big players’ will be waiting on the sidelines poised for a trigger. It’s obvious that the imminent potential trigger would be some sort of fail involving a Greek deal.

Guru’s thoughts: I believe that once/if a Greek deal is complete to a satisfactory standard, this will flush out the bears that are in the market. So generates a relief rally. But, once this is over I think the market will regain some of its understanding to the threatening fundamentals that linger in the background, and will make the market more sensitive to ‘risk off’ triggers. I think that there is a strong risk that Portugal will once again come under the spotlight as they might have to restructure their debt. As I have said before I think that the process we have witnessed in Greece will become a template for Portugal, as was the case with the first bailout. Added fiscal reform will not beat off the bond vigilantes but somewhat strengthen their views as any knock to growth via austerity will trigger further panic over debt worthiness. A trigger could also come in the form of any friction in the French election, as ‘Merkozy’ could split and this could have severe implications on crisis management.