Europe Officially on Recession Alert

by: James A. Kostohryz

According to the German statistics institute, growth in that nation virtually ground to a halt, registering 0.1% form April thru June. This reading was drastically weaker than the 0.5% growth expected by the consensus of economists.

France's growth in the second quarter was zero.

What Can Be Expected Going Forward?

The severe financial markets turmoil surrounding the sovereign debt crisis in Europe can be expected to have a chilling effect on business and consumer sentiment throughout the continent. This should cause economic activity to slow in the third quarter of 2011.

Indeed, one should not be surprised if there are some negative GDP prints in Europe in the third quarter of 2011.


Given its fiscal woes, Europe simply cannot afford a recession right now. A collapse in tax receipts would cause all fiscal targets to be violated and the sovereign debt crisis playing out in debt markets could escalate out of control.

The stakes have been raised. Europe is on recession alert. EU officials will have to take dramatic action in coming weeks to avert a collapse of confidence and a downward spiral in financial markets.

All of this clearly has profound repercussion for the U.S. economy and stock market. In particular, commodity oriented stocks and ETFs such as Freeport-McMoran Copper & Gold Inc. (FCX), Rio Tinto plc (RIO), VALE, Energy Select Sector SPDR ETF (XLE), iShares Dow Jones US Oil Equipment Index ETF (IEZ), SPDR Gold Trust ETF (GLD), iShares Silver Trust ETF (SLV) and Market Vectors Gold Miners ETF (GDX) should be avoided on the long side, and shorts can be considered.

Also note that the S&P sector that is most exposed to Europe from an earnings perspective is the technology sector. The Nasdaq 100 as a whole and many stocks such as Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) derive well over a third of their net income from Europe. Thus, tech stocks could get hit hard if conditions continue to deteriorate in Europe.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.