A Trillion Reasons Why the Euro Is Still in Trouble

Video Transcript

Hi, this is Monty Agarwal for Uncommon Wisdom Daily.

Global central banks have managed to gloss over their problems for the time being, due to their reckless money-printing. By pumping more than a trillion euros into financial institutions, the European Central Bank (ECB) made the markets forget about euro-zone bond auctions for a while. European banks used much of this cash to buy government bonds, which is exactly what the ECB wanted.

But the party is about to come to an end. Wage pressure is building in Germany, complicating the ECB’s monetary task. And tension among central bank members is building. Two German policymakers — Axel Weber and Jürgen Stark — quit in protest of the bond-buying program.

And if the opposition candidate Francois Hollande wins the French presidential election, things could reach the boiling point very quickly, and the euro could take a tumble.

Meanwhile, the European bond market will get a big test this week, when Spain issues debt maturing in 2014 and 2022. If the auction disappoints, the spread between Spanish and German 10-year bonds could rise to 4.5%.

The yield on Spanish 10-year government bonds is already around 6%, amid continued fears about the health of Europe’s fourth-largest economy. The cost of insuring Spain’s debt also spiked to a record above 5.1%, according to Credit Market Analysis. That means it costs 511,500 euros to insure 10-million euros of Spanish government debt annually in a five-year period.

In other words, analysts and investors are increasingly concerned about Spain’s economy and banking system, despite the recent cash injection by the ECB and tough new austerity measures.

But it’s not just Spain. Italian 10-year government bonds were trading above 5.6% earlier this week, while comparable Portuguese bonds were up above 12.6%. And Irish benchmark yields are now the closest they have been to Spain’s since August of 2010.

After a positive start to the year, it’s troubling to see the market sentiment turn so sharply. The return of the euro-zone debt crisis is being compounded by a poor U.S. jobs report and a slowing Chinese economy. As a result, a lot of investors who missed the first-quarter rally and jumped into the market at the start of April have found themselves wrong-footed again.

My Rapid-Growth Portfolio subscribers, however, are well-positioned in a double-barreled play on Europe and U.S. bonds that’s designed to hold up, and profit, in these conditions. This investment is part of the unique Long/Short hedge-fund approach I use, which is ideal for the current market environment.

I’m Monty Agarwal for Uncommon Wisdom Daily. Thanks for watching.

Monty Agarwal has 15 years of experience as a portfolio manager in the hedge fund industry and has trained/managed traders at many Wall Street banks and hedge funds.

And as the editor of the Million-Dollar Rapid Growth Portfolio service here at Weiss, he uses the hedge fund world's best strategies to help his members make low-volatility, high-profit-potential moves in their own account.