For those following the daily markets in the US and Europe, you're probably feeling a bit nauseous from the daily roller coaster ride. It's not the kind of market that any non-professional can handle and even the professionals are struggling. (That's not to say a select few have not profited during this cycle.) Though Greece has been at the center of the headlines for a while, Greece is really not the central problem.
While Greece doesn't help the situation in Europe, the much larger problem is now coming into focus and it's Italy. According to this HSBC analyst, the problems in both Greece and Italy need to be fixed quickly or else we're looking at a global depression.
“The recent events in the euro zone have caused the risk on – risk off paradigm to strengthen even further. Over the last week it has almost become a caricature of itself: we saw extreme euphoria on the back of a purported bailout package followed days later by intense despair induced by the prospect of a Greek referendum," said David Bloom, Global Head of FX Strategy at HSBC in a research note.Greece is still finalizing its unity government though they still have to address the future of the euro moving forward. Italy is also struggling to figure out its future, so lots of unanswered questions are out there. The roller coaster ride isn't over yet.
“These dramatic shifts in sentiment led to rollercoaster moves in risk asset prices," Bloom said.
With cross-asset correlations at an all-time high according to HSBC, Bloom says market participants are comparing the current Greek crisis to Lehman Brothers and has this warning for investors: “Market stresses are currently far worse than after Lehman and the event which people are worried about has not even happened yet!"
