Market Confidence Recovers following New Greece Deal, but for How Long?

Market confidence seems to be recovering following a new deal on Greece. On Thursday, the Eurozone leaders agreed on the form of the second Greek bailout and markets have responded by eating into the value of safe havens. At around 5:40 am GMT, the U.S. dollar rose 0.42% against the Swiss franc to trade around 0.8184, while the euro added 0.2% to its value against the franc to stand around 1.1777. The Swiss franc has probably been the main beneficiary, among currencies at least, of the financial crisis that started in 2008 in the U.S. and then quickly spread to the whole world. Precious metals, other popular safe havens, were also in retreat of Friday. At the moment, gold fell back below the $1,600 mark, sliding 0.18% to stand around $1,588.25. Silver is also trading below an important $40 barrier, losing 0.93% to stand around $39.06. It seems as if the Europeans have managed to find a long-term solution to Greece's problems, which has calmed the markets. On Thursday, the Eurozone leaders agreed on a range of new measures aimed at restoring financial stability in the debt-ridden country. The size of the new bailout was set to €109 billion. The Germans have managed to persuade other countries that it is crucial for the private sector to bear some of the costs of the crisis. It is estimated that the “voluntary participation” of the private sector to the bailout will amount to around €37 billion. In order to restore financial stability in Greece, debt maturity was raised from 7.5 years to a minimum 15 years and a maximum of 30 years. At the same time, Greece will be given a grace period of 10 years. For a long time, the Europeans were trying to prevent the Greek crisis from spreading to other countries. In essence, they have failed miserably in this quest, since the crisis has spread to other peripheral economies. At this point, it was important to minimize the spillover effects of the Greek crisis on other debt-ridden countries on the Eurozone periphery. In order to achieve that, the Europeans had to get Greece out of the headlines. In other words, the second bailout has to be the real thing. The Eurozone cannot afford Greece to be forced into the corner again in a few months time. A decisive action was needed and the Europeans have stepped in when it mattered, or so it seems. 10 year grace period, longer debt maturity and lower interest rates should give enough time to Greece to stabilize its finances and shelter the troubled country from the attacks of bond market speculators. Markets have responded positively to the news as both the euro and the European bank stocks rose following the news. The ultimate question is how long will the euphoria last. After all, the Europeans might try to avoid the word but this is a type of default. The Europeans might speak about voluntary participation of the private sector, but there is nothing voluntary about accepting a 20% haircut, which is a part of two options the Greek bond holders have at their disposal. The rating agencies have already warned the Europeans they will view any “voluntary” participation of the private sector in the second bailout as a default. It remains to be seen if Moody's, Fitch and S&P will start targeting Italy and Spain after one Eurozone country was allowed to declare default. There is a lot of risk in the new Greece bailout plan. Above all, it sends a message that the Eurozone countries can default. The Europeans were, of course, very quick to point out that Greece was a onetime thing. However, as Felix Salmon of Reuters pointed out, the precedent deals never happen only once. It remains to be seen if the haircut in Greece will scare investors away from holding bonds of other Eurozone countries like Portugal, Ireland, Spain or Italy. If this scenario becomes reality, Greece might not be the only Eurozone country allowed to default on parts of its debt. Across the Atlantic Ocean, tax increases for the rich remain the main stumbling block between the two sides. The Democrats have accepted deep spending cuts asked by the Republicans, which control the House of Representatives, in order to bring down the massive U.S. budget deficit. However, the Republicans seem reluctant to agree on raising taxes for the rich. As the combination of tax increases and spending cuts is the only option acceptable to the White House, the shutdown of the U.S. government becomes a more likely scenario with each day passing. In spite of recent setbacks for safe havens like the Swiss franc and precious metals, there is still a lot of uncertainty in the global economy. The shutdown of the U.S. government, or credit rating cuts in the Eurozone periphery, could cause massive problems for the world economy, ultimately resulting in double dip recessions across the globe. It the global economy turns the wrong corner, the value of the franc, gold and silver will be rising to new heights very soon. ACTION ITEMS:

Bullish:
Traders who believe that the market confidence in the Eurozone will be short-lived, which should provide a lot of tailwind for safe-heavens, might want to consider the following trades:

• CurrencyShares Swiss Franc Trust ETF FXF is a long play on the Swiss franc. FXF should rise if the franc appreciates.

• ELEMENTS MLCX Precious Metals ETN PMY is a long play on precious metals. PMY should rise if the prices of precious metals increase.

• PowerShares DB Gold Double Long ETN DGP is a double long play on gold. DGP should rise if the price of gold increases.

Bearish:
Traders who believe that the Eurozone has turned the corner and the U.S. is about to do the same in the next few days, which would restore market confidence and persuade a number of investors to leave safe havens, may consider an alternate positions:

• ETFS Short Swiss Franc Long US Dollar ETC (Sterling) ETF (SCHP) is a short play on the Swiss franc. SCHP should rise if the franc depreciates.

• PowerShares DB Gold Short ETN DGZ is a short play on gold. DGZ should rise if the price of gold decreases.

• ProShares UltraShort Gold ETF GLL is another short play on gold. However, GLL should rise more than DGZ if the price of gold decreases.

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