Managing Risk During Eurozone Instability

European Union Flag

 

The lead in this New York Times story says a lot:

“Europe is in danger of giving itself a nervous breakdown with all the talk of economic failure and irreversible decline.”

This seems to capture the mood of the news reports, analysis and most critically, market activity following the elections Sunday in France and Greece, where political power was splintered among several parties and a governing coalition may be difficult to find.

In response to the situation, several asset classes have traded lower. NYMEX gold hit its lowest point since the first day of trading this year; Copper hit its lowest point in a month,; WTI crude has dropped on expected weak demand; and global stock index futures have declined, including every major U.S. index.

Much of the reaction is due to the shakiness of the euro, which has already fallen against the dollar for seven consecutive sessions, and dipped below the critical $1.30 mark earlier this week.  Oil, gold and copper are all denominated in dollars.

Foreign exchange traders have begun seeing volatility as well at the prospect of a falling euro, particularly in emerging market currencies.

In other words, all kinds of market participants are suddenly finding increased risks in the eurozone. As  the situation here progresses, CME Group’s 56 futures and 31 options products in foreign exchange  will increasingly serve as an important place to manage those risks.

In a paper yesterday on the situation, our chief economist Blu Putnam, summed up the stability concerns in Europe:

 

A splintered Europe is not a crisis, but it does have the potential to destabilize markets, and this will put even more pressure on the European Central Bank to provide several more rounds of long-term lending to European banks to make sure financial markets stay liquid.

 

Until some stabilisation is found, currency markets will be among the most sensitive to this process.  The search for a coalition in Greece, political rhetoric from newly elected leaders, and future votes will place pressure on the Euro. This makes liquid FX markets particularly valuable in the months ahead, as the uncertain situation in Europe invites the need to manage all the risks associated with it.

 

About the Author

William Knottenbelt is Senior Managing Director; Europe, Middle East and Africa and Chief Executive Officer of CME Europe.

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