Euro Zone Recovery

A Euro Zone recovery may be in the works. Stocks rallied in Europe on news that Germany, as well as China, manufacturing indices came in higher than forecasted. A sign of renewed confidence on the continent was the lower interest rates paid at auction for Italian bonds although French bonds weakened. Meanwhile the Euro fell against thirteen of the sixteen currencies that it trades against. After the European Central Bank dispensed loans to a large number of ailing banks the specter of a run on French banks has receded. For options traders a Euro Zone recovery could mean profits in European stocks or in trading options on the Euro. Much of the difficulty in trading the Euro or European stocks has come from uncertainty. Many doubted the willingness of the EU to come up with the money needed to bail out ailing economies. Many also doubted the ability of the EU to come up with a solution that did not simply encourage greater and greater debt. The recent EU economic summit may have come up that solution and the key to longer term Euro Zone recovery. Trading options on Euro Zone stocks could be profitable.

The recent EU summit arrived at two useful solutions. One is that going forward Euro Zone economies will be more closely linked, with the end result that it will harder for nations to overspend. The other is that the European Central Bank now has more flexibility and independence in dealing with both insolvent banks and insolvent nations. The bank recently made loans of roughly half a trillion Euros to stabilize the continental banking system. Investors and traders were first relieved that the bank was putting things in order. Then everyone seemed to change their minds and worry that the various banks needed so much money in the first place. Nevertheless, the fact that the EU seems to have a clearer game plan and that they are taking firm action seems to have pleased the markets. The French austerity plan is a good case in point. Now the news that manufacturing is stronger in Germany, the continent’s leading manufacturer, leads traders and investors to believe that a Euro Zone recovery is in the works. It also does not hurt that manufacturing in China came in ahead of forecasts and that the US economy seems to be finally picking up steam.

A Euro Zone recovery will not necessarily mean that all stocks will rise. For example, investors and traders are more interested in German companies as the German economy is stronger and more stable. As evidenced by the rise in stocks and fall in the Euro recently it could well be that a developing Euro Zone recovery might not be linked to a stronger Euro, at least in the short term. This is, of course, one of the reasons why many buy options. Whether it is dealing with volatile foreign currency rates or a chaotic stock market, traders can hedge their investment risk when buying calls or puts on stocks or currencies. Likewise the ability to leverage investment capital gives options traders the opportunity to multiply their gains should a strong Euro Zone recovery emerge.

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