The Greek Election Will Bring A Financial Storm To The Markets

If the threat of deflation and massive unemployment was not already bad enough, things are about to get even worse.

Once again Europe finds itself in another financial storm, so expect to see a lot of volatility and uncertainty in the markets between now and the next three weeks.

For the third time in 5 years it is Greece all over again.

A week ago the Greek government decided to hold a snap election on the 25th January.

So what’s the big deal about that?

The snap election could mean that the far-left Euroskeptic party known as Syriza could get into power. The Syriza party is anti-austerity and they have promised that they will re-negotiate the bailout agreement should they win the election.

What makes the markets nervous is that if Syriza wins, this could derail the European bailout programme and that Greece could default on its debt.

The Syriza party is currently ahead in the Greece opinion polls, according to the Wall Street Journal.

The possibility of a Greek exit from Europe will create uncertainty for the markets in the next few weeks.

One thing I believe we can be bet on is this:

The European Central Bank (ECB) will continue its aggressive policy of quantitative easing or money printing to prevent the risk of a Greek exit.

This will further devalue the Euro currency, and therefore will place upward pressure on the US dollar in 2015.

From a trading perspective, we can consider shorting rallies in the Euro currency and European stocks (see charts below).

Let’s take a look at the chart of the Euro currency (EURUSD):

We have been short on the Euro since it broke its upward trendline in June of last year (see red arrow on the chart). This has been a very profitable trade and since June the Euro has fallen by 1600 points or 12%.

Although it is currently at support at 1.20, our targets for the Euro in 2015 are below the lows of 2005 near 1.15.

Shorting rallies in the Euro is still the safest strategy for now.

Now let’s take a look at the Euro Stocks 50:

You will notice from the chart that Euro stocks are near an important support level (shown as the red trendline). If we break and close below this level which is currently at $36.70, there is very little support until we probably reach $32.

Therefore we will short the Euro stocks 50, provided we first get a close below the trendline.

It is also worth noting that European stocks are considerably undervalued. So there may also be a “buy” opportunity in 2015, provided we get a close above the downward trendline (shown as the blue line on the chart). This level is currently at $38.

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