The Real Deal on Wall Street: The Vortex of European Euphoria

Investor, trader, watcher of the market from afar - we are three weeks into 2012 and the European Union is still…the European Union.

Greece has not moved to readopt the drachma as a means to devalue its way out of its financial troubles. France and Spain have had relatively successful debt auctions. The EFSF managed to sell $1.9 billion in six-month debt a day after S&P tried its mightiest, yet again, to show that its after the fact ratings analysis is relevant. All of these have been positives inside a situation that was as fun as watching paint dry in 2011.

With the temporary euphoria playing a large role in the bidding up of risk assets to start the year, a touch of complacency (have you seen the VIX?) has seeped into the market. When I see CDS on investment grade European companies at the lowest since October 31 (hinting at less risk of contagion from those infected balance sheets of the EU periphery countries) thoughts of wondering what may pull us from this euphoric vortex justifiably arise in my head.

The Real Deal is these feel good vibes will be severely tested in coming weeks, so be prepared to hedge upside exposure with downside protection (or cash in some chips gained from the rally).

International Events to Mark Off on the Calendar:

• European Union governments must raise $218 billion in new bonds in 1Q12.
• Italy has two slugs of debt due in the last weeks of January and February.
• European Union officials have to decide by March whether to raise the firepower of the bailout fund by 500 billion euros.
• Greece has 14.4 billion euros of debt due on March 20.