How to Play Uncertainties in the Eurozone

This article published with permission from InvestmentU.com.

There seemed to be a little hope mingling in the markets at the end of last week.

Global equities rose for a fourth straight day on Friday. The Nasdaq had just finished posting its biggest weekly advance since the summer of 2009. The cherry on top came in the form of gains elsewhere in global equity markets, maybe indicating that some suggested risk aversion dissipated.

The euro had its best week versus the dollar in the last two months.

The euro found this new strength when the announcement came down that, on Thursday, the world’s leading central banks will boost short-term dollar funding for European banks facing a dollar shortage. Markets believed that there would be support from the central banks to combat any possibility of an economic disruption in Europe. And there’s also the possibility that the weekend could bring even better news from Europe after Treasury Secretary Timothy Geithner meets with European banking leaders.

However, with the optimism there still loomed some trepidation. Friday saw a sharp decline in French and Italian banking stocks. This showed that there remained a cautious tone in the market despite encouraging signs of growing efforts to resolve the debt crisis.

Monday reality sets in

Monday morning showed these fears were warranted:

• The Dow Jones Industrial Average markets/index was down 195 points, or 1.70%, at 11,313.
• The Standard & Poor’s 500 Index was down 20 points, or 1.68%, at 1,195.
• The Nasdaq Composite Index (Nasdaq: IXIC) fell 27 points, or 1.06%, at 2,594.

Over the weekend, European Union finance ministers made no headway in the sovereign debt arena, nor did they decide whether to give additional funding to the current bailout fund. Secretary Geithner drew responses from EU policymakers that ranged from lukewarm at best to testy when he encouraged them to leverage their bailout fund to deal with their debt crisis.

And once again there was Greece.

There’s an overwhelming belief now that Greece will fail, and sooner rather than later. International lenders told Greece on Sept. 19 that it must reduce its public sector and improve tax collection to avoid default within weeks. It’s well noted that there’s not a great deal of Greek public support for the austerity measures demanded.

Secretary Geithner attempted to convey to the leadership that the “loose talk” surrounding the possible defaults of Greece and Italy do nothing but heighten the danger of the situation. A Reuters poll of more than 50 European economists gave a 65% chance that Greece would default. Half of those surveyed stated that it would do so within 12 months and a vast majority thought that they wouldn’t be forced out of the currency bloc.

Geithner went on to say that it looks particularly bad from the outside looking in when the conflict isn’t about strategy and plan specifics but more about the member governments and the Central Bank.

How to play Eurozone instability

To put it short, the Eurozone isn’t on its way to a recovery or any semblance of stability.

Investment U’s

On July 28, Chief Investment Strategist, Alexander Green, wrote a column recommending Market Vectors Double Short Euro ETN (NYSE: DRR)

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an ETF that’s up 7% since that time

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as a way to take advantage of Eurozone banking issues.

Yesterday, Alex recommended another way to take advantage of what he believes is an oversold and weak dollar: PowerShares DB US Dollar Index Bullish (NYSE: UUP).

And, according to Alex, both funds still have plenty of upside.

Jason Jenkins is a part of the research team at InvestmentU.com. See more articles by Jason here.