Investors around the world are hungry today for news from a summit of European leaders in Brussels deciding the financial fate of Greece and its debt-burdened economy.
Markets have gyrated during the last few days on speculation of whether or not the European Union will provide a bailout, with some institutional investors warning of dire consequences if the leaders fail to backstop the Greek government.
The sovereign debt crisis has engulfed not only Greece, but also Spain, Portugal, Ireland and parts of the Middle East, causing investors around the world to flee risky assets. At the same time, credit default swaps used to hedge investor positions in sovereign debt have surged to record levels recently, raising concern about a new round of hidden exposure to derivatives.
In this charged environment, the EU summit adds significant risk to market conditions, says Myles Zyblock, the chief institutional strategist and director of capital markets research at RBC Dominion Securities Inc.
"A spirited equity rally could follow any hint of a resolution, while another leg down seems likely absent concrete progress to tackle the region's fiscal problems," he wrote in a report published yesterday.
It's hard for an individual investor to hedge against this two-path scenario, so instead he suggests managing the risk using "a sector barbell" that tilts the weights to one end or the other.
Mr. Zyblock thinks that "the market is beginning to side with a more positive outcome" from the EU discussions. Germany and France were leading talks late yesterday to try to hammer out a plan in advance of the summit that would shrink Greece's deficit, estimated to be nearly 13 per cent of gross domestic product. The bond market suggested a resolution was near, with the yield on the Greek 10-year bond declining 0.37 percentage points to 6.01 per cent. But even as discussions progressed, Greek civil servants walked off the job for 24 hours in a show of force against any government move to cut debt by reducing salaries.
