All around the world, markets are dropping in value because of the crisis in Greece. The major U.S. indices dropped about 2.1 percent each, while European markets were hit even harder. The German DAX went down 3.6 percent and Spain’s IBEX went down 4.6 percent. In Japan, the Nikkei fell by 2.9 percent. It was expected that markets would drop before an official default occurred in Greece, but a failure of this magnitude, a full business day before IMF payments were due, was more extreme than most people expected.
The correct move at the start of the business day was to go short on major indices regardless of where you trade. Because while most of the damage that has been going on only affects parts of Europe directly, experienced traders know that nothing happens in isolation. When the European market falls, it doesn’t affect just Europe; the repercussions are felt all over the world. The process is both reactionary and fundamental in nature. The immediate effect that was felt in other parts of the world on Monday, June 29th, was pure reaction. However, as the crisis expands, the end result will be that U.S. stocks will be hit.
The good news is that a drop of this magnitude probably isn’t as much as was warranted. That means that stock indices will go up on their own if no new data out of Europe emerges that justifies the more than 2 percent drop in U.S. prices.
The odd thing that did occur was that the euro went up in value against the U.S. dollar. Most experts believed that the euro would drop significantly, but the opposite happened. The euro went up by over 2.4 percent against the USD. A large part of this is likely because of the inverse relationship that the USD and the U.S. stock market tends to have. Historically, the relationship is inverse, meaning that when one goes up, the other goes down. It’s not a perfect relationship as they do not move in opposite lockstep, but it is enough of one that short term traders focus heavily on it, especially binary options traders and Forex traders. Also, remember that the dollar is still in a better spot than it was a week ago. The dollar was gaining value steadily before the weekend’s announcements out of Greece occurred, and the gains that the euro saw are likely to be short lived. Still, at this moment, the EUR/USD pair is going to be more difficult to predict than the major U.S. indices will be. For binary traders looking for something with a little more stability, a focus on the S&P 500 is probably the most prudent choice.
The other takeaway from the rise of the euro’s value is the fact that the U.S. stocks have more room for improvement. When the dollar is strong, stocks suffer due to the fact that it costs more for foreign investors to do business in the U.S. However, because the dollar dropped, wiggle room has been created that will allow for a faster bounceback once the true severity of the Greece crisis is determined. There might be more short term drops all over the world for a few days, but the most likely outcome at this point is for the euro to drop in price and for European stocks to suffer a bit, too. The dollar will regain value eventually, but stocks in the U.S. have upward potential at the same time. This just illustrates the fact that playing the dollar and the major indices off of each other isn’t always the smartest move. It will be an interesting situation to watch for the next few weeks, both economically and politically as Greece’s future within the Eurozone is uncertain.