The Euro Short Squeeze - Investors flock to the US, but are we ready?

One crisis creates opportunity elsewhere. Europe's rocky period with sovereign debt fears and an anticipated correction with a massive rescue package made the markets react positively for only a short period of time. Now, the sentiment has decreased over the fiscal stability of the Euro-zone. A short term fix is not enough, and the problems seem to be getting worse. This fear caused foreign investors to seek safe havens; these alternatives such as gold and US bonds tend to do well during volatile periods. After discussing the positive impact on gold prices, it's now time to shift our focus back to the US.

Global demand for US assets has soared to a net buying of $47.1 Billion according to the Treasury Department. China has increased their holdings of US debt by about 2% with the addition of $18.7 Billion in notes and bonds. According to Bloomberg Business Week, signs of US recovery have contributed to this increase in demand.

Remember before the European Sovereign Debt crisis unfolded, the world feared that the US Dollar, being the reserve currency, was at serious hurt. Many raised concern about the steep drop in the dollar during the recession. All along, all eyes were on the Euro; there were even talks about the potential of the Euro being the new reserve currency. As trite as that may sound, the world was in panic and many were seeking the alternative gems. The European gem lost its charm at the start of 2010, as debt issues escalated. The US Dollar responded with a sudden rally, and thus the world regained trust in the reserve currency.

However domestic conditions are not up to par to make this an official recovery. Investors are speculating based on the worsening Euro conditions and the appreciation of our dollar. Once that fades, all attention will return to US economic conditions. Currently, even though the amount of jobs have increased, unemployment numbers have remained at a high rate. Is it any wonder why the Federal Reserve continues their hawkish monetary policy? Interest rates remain near zero because the economy is not back on track, despite foreign interest in US assets. Again, the markets are ready, but the US must fix their domestic problems to prepare for that shift in demand from Europe.

The first chart above displays an interesting reaction. The Euro had a slight rally following the Treasury Department data about rising demand for US assets. This is because of risk; short coverings and such. Investors realize that it's crunch time. Many economists see the Euro declining to parity with the US Dollar, and investors are anticipating a shift of focus on a sensitive US market.

The debt crisis has created high volatility in the US stock market, and foreign demand has increased US Treasury prices and decreased yields. For investors, the markets remain very volatile. I suggest observing the reactions to better prepare your entrance.

Remember, the markets produce data that measures the mood of investors. Reactions are mixed, and the investors are busy allocating assets, and positioning investments. Wait and watch as the flow of money moves throughout the world. Once you have a clear view of where the money is, that's when you enter. These series of posts are meant to help with this observance. When the time is right, I'll have my investment outlook ready.