The European debt crisis has now become synonymous with volatility in our global trading markets.  Market valuations in equities, commodities, and currencies have gyrated in the past few months at rates that would frighten even the most experienced of traders among us.  Investment advisors have counseled their clients to withdraw from the markets, searching for “safe havens” until the storm passes.  Trading volumes have declined, even when the U.S. economy has begun to show signs of a modest recovery.  Even our agricultural futures trading, typically immune from political maneuverings, has lessened, a direct result of the European contagion as reported in numerous commentaries.

Each day a new headline causes a “shot heard round the world”.  In today’s news, “spiking bond yields in Spain” have reached 7%, a level that most experts portend is unsustainable.  As the malaise spreads to other weaker member states, the Euro has resembled a rollercoaster ride to end all rides.

In the diagram above, daily pricing candlesticks for the “EUR/USD” currency pair are displayed for the past twelve months.  An “Average True Range”, (“ATR”), indicator has been added at the bottom to reflect the increasing volatility trend that has been forming since this past March.  Daily value changes are exceeding 2% when 1.2% is the predominant historical average.  Speculation is also on the rise, as denoted by the higher “green” bars in the middle of the chart.

Volatility, as measured by the range of value changes over a specified period, is generally less in our forex market than for equities.  Stocks are typically 2 to 3 times more volatile, but the frequency of “whipsaw-like” changes, like those depicted above, is the distinguishing trait of currency valuations searching for a new equilibrium.  Even the best forex broker around cannot smooth out these gyrations with internal “bid/ask” machinations.

Predictable volatility actually facilitates speculation and the potential for opportunity gains amongst the trader community.  Traders, however, retreat when the “whipsaw” effect is too pronounced.  The curiosity then revolves around the root causes for such sudden pricing reversals.  Many experts are pointing at the news media as today’s “culprit”.  The temptation to “one up” your competition with the latest newsworthy comment refuting the last bit of news is too great for financial news editors to resist.  Every writer understands that controversy draws attention, and more attention equates to increased ratings, the lifeblood of every publication surviving on advertising revenues.

Is there a potential solution to this crisis or will the cascading “dominoes” of weak member states threaten the future of the Eurozone experiment?  Conventional wisdom states that major structural changes must be implemented in Europe.  German exporters have benefited greatly by replacing the Mark with a weaker Euro, but Germans are unwilling to share these benefits with weaker countries where the opposite effect has transpired.  The market has shunned most schemes put forth to date as mere “window-dressing”.  Even government shakeups in Greece and Italy are not stemming the tide of discontent.

Expect volatility to remain for the foreseeable future.  Greeks and others have no “gifts to bare.”

Morningstar markets editor Jeremy Glaser sees if less is more for HP, Abercrombie & Fitch, the eurozone, and more.

Brean Murray, Carret & Co is a research driven investment boutique committed to deliver top tier investment services to growth companies and investors.

Special points of interest:

• Equity valuations — Opportunity or a warning signal? By Anwiti Bahuguna, Senior Portfolio Manager
• Sushi anyone? By Marie Schofield, Chief Economist
• A big dive in consumer confidence By Marie Schofield, Chief Economist

The Federal Reserve on Tuesday kept rates unchanged but