Optimism that Europe had finally turned the corner in its financial crisis triggered an explosion in the US stock market Monday with the Dow surging by triple digits.
Investors around the world breathed a collective sign of relief after German Chancellor Angela Merkel and French President Nicolas Sarkozy promised to unveil a comprehensive new package to ease the euro zone's debt crisis, though details won’t be made public until the G20 summit which is scheduled to begin Nov 3rd.
Meanwhile, the Street was also relieved to learn regulators were moving forward with plans to nationalize Franco-Belgian bank Dexia – developments were considered an indication that governments would step in and keep large lenders from going under.
"The market gave Merkel and Sarkozy the benefit of the doubt,” says Quincy Krosby, market strategist at Prudential Financial in a Reuters interview. The Dexia rescue shows European governments "can act quickly and decisively," if and when needed. The market is willing to wait for the details.
Although a portion of the stock market gains stemmed from positive sentiment, another part was due to renewed strength in the euro which rallied sharply against the US dollar.
(Lately a weak dollar has been good for stocks – buoying commodity related sectors such as Materials and Industrials . Both sectors advanced significantly, Monday.)
But the euro gains may be deceiving, Axel Merk of Merk Investments explains. “For the time being we have a short squeeze." In other words, the promise of new aid is causing short sellers to cover their positions.
But the moves may be little more than that. In fact trader Stephen Weiss would bet on it. ”The euro could rise to 140,” Weiss admits but ultimately it’s a troubled currency.
Weiss suggests stepping back and looking at the big picture - he doesn't think you'll like what you see.
He thinks Europe will have to inject massive amounts of liquidity to stem the financial crisis – “just like the US had to do in 2008,” he says. “And guess what? When we did it here a few years ago it drove our currency lower. When they do it in Europe, it will drive the euro down – and the dollar higher.”
If you have a short -term time horizon and you're looking for a trade, Brian Kelly has a thought for you. He thinks the trade is long euro until the details are made public at the G20 meeting currently scheduled to begin Nov 3rd. “The market is so short, there should be covering until the details are released.”
What do you think? We want to know!
