A double dip recession in Europe is now official, and in spite of last week’s flashy rally and Greece being “fixed” again, storm clouds are building as we look to the end of the year and 2013.
A double dip recession in Europe carries ramifications that have yet to be seen but surely will be felt in coming months.
Here are the facts:
1. Europe is officially in a double dip recession with 3Q GDP down 0.1% that followed a 0.2% decline in the second quarter.
2. Industrial production continues to slow in Germany and last week, Moody’s downgraded France’s credit rating to Aa1 from Aaa which indicates that the European problems are starting to infect the “core” nations as well as the “periphery.” Read Eye On Germany: Weekly International ETF Report
3. Europe has agreed yet again on how to save Greece, but one can only wonder how long this “fix” will last and will it finally draw the European debt crisis to a close and will this ongoing effort be sustainable with a recession in Europe.
This is all troublesome news s a recession in Europe will inflict economic pain on the Continent, but potentially impact the United States, as well.
Europe is the biggest trading partner of the United States, and U.S. companies exported nearly half a trillion dollars to Europe last year. The block generates 10% of S&P 500 revenue and so problems in Europe will also likely affect U.S. markets going into 2013, both on a crisis management and earnings level.
With fundamental headwinds including a growing recession, credit downgrades and ongoing problems in Greece, the picture becomes more difficult on a weekly basis. If Europe heads back into recession and can’t resolve its problems with Greece, the world economic situation will get more thorny but there are still ways that ETF investors can seek profits in this complex environment.
Here are some potential avenues to consider:
ProShares UltraShort Euro (EUO)
This ETF is designed to move twice (200%) the daily performance of the Euro so if you believe that recession in Europe will be Euro negative, this ETf could be a good bet.
ProShares Short MSCI EAFE (EFZ)
This ETF seeks daily investment results which correspond to the inverse (-1x) of the daily performance of the iShares MSCI EAFE Index and so should rise if the underlying index falls.
Leveraged and inverse ETFs can be tricky to use and so you need to understand how they work so read the prospectuses carefully and approach this arena with a well thought out plan.
European and U.S. markets put in good showings last week on thin holiday volume and it’s quite likely that fund managers and institutions will try to bid up prices to put a good showing on yearly performance. However, significant storm clouds are forming over Europe which will likely offer both danger and opportunity in the New Year.