One Thing Is Certain About the Eurozone

04/23/2012 2:30 pm EST

Focus: STRATEGIES

John Netto

Author, The Global Macro Edge

News from the Eurozone continues to drive short-term trading, says John Netto, but with the longer-term picture much more certain, traders can add much-needed clarity to their approach.

Traders are still hearing a lot about the Greek issues and European debt. How does it affect your decisions as a trader? Our guest today is John Netto to talk about that. So, John, how does this whole thing playing out impact your trading decisions these days?

One of the biggest things that I live by is that ambiguity buries markets, and when it comes to the Greek debt issue, it’s not that the market can’t handle a Greek default. I mean, it would be potentially calamitous in some ways, but ultimately, the market could deal with what it knows.

The problem with Greek debt is that we just don’t know how things are playing out. We don’t know the state of Italy; we don’t know what’s going to happen in Spain; we’ve got some issues over Portugal, and we’ve seen some of Portugal’s credit default swaps (CDS) blow out.

It creates a different metric because now that Europe is the center of attention, most US traders are used to trading from 9:30 am to about 4 pm. Well, now, a lot of price discovery happens at 3 am, 4 am, or 5 am here in New York, and if you’re out on the west coast, even earlier.

So as a trader, it’s taking a short-term concept versus a longer-term concept. Longer term, Europe has a lot of problems. So as a result of knowing that the long-term fundamentals still bode for a down move in the euro, I’m big on selling rallies like we’ve had recently in the euro, and I’m also big on buying the dip because I think that the global central banks will come together and they will find a solution, but as long as we’re in a market that has a lot of ambiguity, it’s sell rips and buy dips.

Alright, John, so how are you taking advantage of that ambiguity?

There are a couple of ways. One thing that best encapsulates the European sovereign debt crisis is gold priced in euros.

You take a look at a hard asset here, you take a look at the euro currency, and over the last couple of years, since this euro crisis first began, gold has gone from 750 an ounce priced in euros to over 1300 an ounce priced in euros. So that’s one obvious way to take advantage of that trade.

The next is to find a non-US-dollar cross. Look at EUR/AUD; look at EUR/JPY. EUR/JPY has rallied recently and has reflected that.

Also, you can do the classic developed market versus emerging market play, or even something like the Dow Jones Euro Stoxx 50 versus the S&P 500. The S&P 500 has really outperformed the Euro Stoxx 50, but if the perception that the Eurozone is going to get their act together comes back into play, that Euro Stoxx 50 market should begin to outperform the S&P.

So you have two highly correlated assets. You have the S&P 500, which is in essence a proxy for our corporate risk appetite in the US, and the Euro Stoxx 50, which is the proxy for the European risk appetite, which covers and spans nine countries of European stocks out there.

Now, John, I know you’re mostly a technical trader. How do you balance looking at the fundamentals but still focusing most of your time on the charts?

I trade sentiment, not reality, and as a trader, you have the trade sentiment. So largely, technicals encapsulate sentiment, but there still is a headline component for that as well.

I talk to a lot of the sharp newsletter writers out there, a lot of big global macro fund managers, and I get a sense of what the big money is doing and what depth perception of the market is. And by understanding the perception of where the market is going, irrespective of what’s actually happening—as counterintuitive as that may sound—I get a sense of how I can maneuver and how I can position myself.

Right now, the overwhelming sense from the sharpest minds out there and some of the sharpest economists out there is that the euro is ultimately going to parity. But, monetizing that trade idea versus actually seeing what’s going on from a day-to-day basis are two entirely different things.

I have to be a trader of the trades in the short term and still have a longer-term macro view that helps me build longer-term positions.

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