Buy the rumor, sell the EU summit
Eight times this year, European Union leaders have met to tackle their deepening sovereign debt crisis, raising hopes in financial markets that a solution could be close.
All eight times, the meetings have ended without a plan of action comprehensive enough to give more than a few days comfort to investors, often turning initial gains in stocks, the euro and European government bonds into declines within days.
“I guess that’s why they call them summits. You sort of go up on one side and come down the other,» said Gary Baker, European equity strategist at Bank of America-Merrill Lynch.
Investors’ lack of confidence in European leaders has become so ingrained that the time it takes for traders to begin dumping euro zone assets after each summit has grown shorter and shorter.
Strategists at Germany’s Commerzbank said it took 49 days from the first Greek bailout in 2010 for the cost of buying insurance against a Greek default to hit new highs.
When Ireland was bailed out later that year, it took 30 days, the bank said in a research note this week.
By the time Greece received a second bailout in April 2011, Greek credit default swap prices hit highs in just 14 days. Investors then moved quickly on to Italy. It took just 12 days for insurance against an Italian default to peak.
“Trading is like playing three-card monte these days — you’re always trying to guess what new trick policymakers will come up with and to what extent you can believe them,» said Michael Cheah, who manages a $1 billion (646 million pounds) fixed income fund at SunAmerica Asset Management in Jersey City.
Europe’s debt crisis has forced emergency bailouts for three countries and may, some fear, cause the euro itself to collapse and deal a blow to the global banking system.
Investors have had to re-learn the tools of the trade.
Tried and tested strategies such as picking stocks for value, a government bond based on interest-rate differentials or a currency because it is issued by a country with a strong economy seem almost quaint as political risk dominates.
As investors execute U-turns to avoid being trampled by the volatile markets, the new way that different assets increasingly move in lockstep has scared away buyers who traditionally trade on fundamentals like valuation.
That has tightened the relationships as the traders left in the market are those who buy and sell those assets — such as commodities, the euro and stocks — in tandem and often in a matter of a few hours.
Brown Brothers Harriman currency strategist Marc Chandler noted that the euro and the S
