News that the European Central Bank (ECB) will buy short-term government bonds has thus far calmed global financial markets. Last week the euro currency (NYSEARCA:FXE) jumped 1.85%. Can it hold?
Despite its spreading debt crisis, the euro has been resilient. Over the past year, the currency is down just 9.34% versus the U.S. dollar and off by only 3.73% over the past three years.
Massive bond purchases are no cure for Europe’s ailing economy. During the second quarter, both consumer spending and corporate investment in the eurozone fell (NYSEARCA:VGK). According to a Bloomberg poll of economists, Europe’s economy will continue to contract into the first quarter of 2013.
Instead of stronger eurozone members lifting up the weaklings, the latter are dragging down the rest. Economic activity in the "strong zones" like Germany (NYSEARCA:EWG), France (NYSEARCA:EWQ) and Italy (NYSEARCA:EWI) are decelerating.
Besides regional contagion, Europe’s fiscal problems are impacting economies elsewhere.
In China (NYSEARCA:FXI), a manufacturing slowdown is accelerating at its fastest pace since 2009. China is the world’s second largest economy and has been looked to as a sort of economic savior. Also, the Chinese government confirmed its purchasing managers index released on September 1, had its first contraction since the Q4 2011.
The ECB’s bond buying program is a short-term fix, not a long-term solution. It may ease financing in the short run, but does nothing to eliminate or reduce sovereign over-indebtedness. If the ECB is committed to buying unlimited quantities of short-term government bonds, what prevents governments from issuing unlimited short-term debt?
For now, the euro is near breaking above its 200 SMA and looks like it’s providing another good trading setup for euro bears. The ETF Profit Strategy Newsletter and Technical Forecast provides support/resistance levels for the euro along along with target prices, stop/loss areas, and high probability setups.
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