Over the last several months, I've been harping about what impact a European recession might have on the U.S. economy and stocks. However, in today's "I'll believe it when I see it society," and with a stock market on the rise since early October, investors have been hard to sway. Still, I'm a tough cookie, willing to take the abuse of popular opinion to guide those willing to listen toward the protection of their capital and advanced, wise placement of new money ahead of the herd. So, with regard to Europe, can you hear me now?
It was just a few days ago when I said the Greek problem was our problem and held steady on my bearish call on the rising European ETFs. Well, Tuesday the EURO STOXX 50 Index dropped 3.4%, and that Vanguard European ETF (VGK) that was sticking stubbornly higher last week, dropped 4.1%. The iShares S&P Europe 350 Index (IEV) fell 4.0%, and the words of your favorite Greek turned golden. It seems by the movements of the markets that most of you were surprised, but readers of my column sure weren't.
The reason for the latest lashing was prophesied almost word for word in previous articles found along this string. Deteriorating European economic data is increasingly indicating recession is plaguing Europe, coloring in the areas we demarcated for our following friends over the last few months. Meanwhile, the recently reported as resolved Greek issue lingered, like we said it would here. But let's not lull too long in the lotion of our latest lucid thoughts.
The European Union reported on Tuesday that economic output contracted 0.3% in the fourth quarter of 2011. The important economic region's weakness was hurt by soft household spending, manufacturing activity and exports. Yet, no economist should be surprised, as the austerity being forced down the throats of Europe's most indebted nations (better when slowly digested) was bound to choke economic activity during this post financial crisis new age. The secular bear seems set to roar some more now as a result.
Add to the economic woes of the Europeans the threat of Greece missing its deadline to restructure its privately held debt via swap, and you have the recipe for a stock market wake up call. Greece has secured the agreement of some 58% of its private debt-holders to-date to accept a severe change in the terms of their contracts, hinged on a halving of the money owed them. Greece had hoped, somehow, to secure 90% agreement, but misjudged as usual. All of the nation's major banks and probably its pension funds are bowing to government pressure, and over 30 European banks and insurance firms have been successfully coerced to surrender as well. Greece will employ collective action clauses to force the rest into compliance, if it secures adequate approval to change the terms of the agreement. Everything seems to be up in the air still, with the deadline set at 10:00 PM Thursday Athens time.
Some of the institutions which have agreed to participate are Ageas (OTCPK:AGESY), Allianz SE (OTCQX:AZSEY), Alpha Bank SA (OTCPK:ALBKY), Axa SA (OTCPK:AXAHF), La Banque Postale, Banco Bilbao Vizcaya Argentaria SA (BBVA),BNP Paribas (OTCQX:BNPQY), CNP Assurances SA (CNP.AF.PK), Commerzbank AG (OTCPK:CRZBY), Credit Agricole SA (OTCPK:CRARY), Credit Foncier, DekaBank Deutsche Girozentrale, Deutsche Bank AG (DB), Dexia SA (OTC:DXBGF), Emporiki Bank of Greece SA, EFG Eurobank (OTCPK:EGFEY), Generali (OTC:GDEUF), Greylock, Groupama SA, HSBC Holdings Plc (HBC), ING Bank (ING), Intesa Sanpaolo SpA (OTCPK:ISNPY), KBC Groep NV, Marfin Popular Bank Plc (OTC:MYPSY), Metlife Inc. (MET), National Bank of Greece (NBG), Piraeus Bank SA (OTC:BPIRF), Royal Bank of Scotland Group Plc (RBS), Societe Generale SA (OTCPK:SCGLY) and Unicredit SpA (OTCPK:UNCFF).
The S&P 500 Index was up Wednesday, but dropped 1.5% Tuesday, with the SPDR S&P 500 ETF (SPY) off the same amount. Why would you suppose that is if not for the tragically real economic risk posed by a European recession to the U.S. economy? That said, the latest American data refreshed the thirst of greedy traders seeking reason for rise, with the often off ADP Private Employment Report noting the estimated addition of 216K private sector jobs in February. As Europe starts to rub off on the rest of the world, including the American economy, which ships 20% of exports into the struggling domain, I expect global markets will move lower in more determined fashion. So, I continue to warn against taking satisfaction in the economic data of the day, while not considering what may change in the months ahead. And I haven't even mentioned the Iran trigger, which weighs heavily over our collective heads.