Potential European Impact This Week On Your Investments

06.05.12: As we “close the books” on May and move solidly towards the summer, we wanted to give you a “look ahead” at a few items that we will be tracking carefully during the week. These are just a few opinions that we have, and as with life, nothing is certain about them.

1. First, here is a “week-at-a-glance” view of several key market drivers for the next four business days. Beginning Monday, data on April factory orders was released. Tuesday is busy both politically and economically, as voters go to the polls in Wisconsin’s gubernatorial recall and GOP primaries are being held in California, New Jersey and several other states. Also on Tuesday, The Institute of Supply Management issues its service sector index for May. Wednesday brings the release of the Federal Reserve’s survey of regional economic conditions and The European Central Bank holds a policy meeting. Thursday is a very important “market watch” day, as Federal Reserve Chairman Bernanke testifies before the congressional Joint Economic Committee. The market week ends Friday with the U.S. reporting on balance of trade figures for April.

What does this mean for investors? In addition to Bernanke’s testimony on Thursday, we are particularly interested in the manufacturing-driven data. It certainly appears that manufacturers around the globe are expanding more slowly. Clearly, this is driving concerns that we are in a “synchronized” slowing of economies around the world.

2. Both the European Union and the European Central Bank are under increasing pressure to come up with a new “game-plan” for Europe. Top EU and ECB officials are apparently at work on a “master plan” to create an entirely new Europe, including banking, fiscal and political union. Germany is indicating it could drop its opposition to the fiscal and banking elements if EU governments agree to give up more sovereignty, although Angela Merkel is still publicly objecting to Eurobonds.

What does this mean for investors? The sooner a more coordinated plan can come together, the better. Our concern is that in the true nature of politics, national leaders will only come together when they can cast themselves as the “savior” of the situation. In our opinion, much like happened in last year’s debt ceiling debate in the U.S., this will be way too late to be as effective as it could be. In the meantime, the “slow drip” that is Europe, with all of the uncertainty that is created, continues. If there is one thing that the U.S. learned from 2008, it is that you have to “hit hard and hit fast” to turn such a major crisis around.

3.We are closely focused on the Spanish bond auction this week. In a little bit of a “mayday” communication this morning, Spanish Treasury Minister Cristobal Montoro said that because of the risk premium currently being encountered, Spain is practically “shut out” of the markets. Montoro added that the EU should help capitalize the country’s banks, diverging from the opinion held by Spanish Prime Minister Rajoy that the country does not need external help. A big test will come tomorrow when Spain goes to market with a significant bond auction. Spain is quickly becoming “ground zero” as the new test of the political will of the EU.

What does this mean for investors? It is hard to imagine a viable European solution to the crisis without a stronger political move towards centralized control over banks and the way that the ECB lends money. Investors need to understand that political risk, which is at the core of the European crisis, is by far the hardest to predict and control. Investors need to have a sharp eye out for protecting their wealth accordingly.

4. The crisis in Europe is strongly connected to China. Investors should not be seduced by the fact that Europe is the only issue out there. Sometimes, that is easy to do with the way the headlines dominate. What is most important is how the European dynamic is “connected” to the rest of world markets, particularly those like China that heavily supply them. When the “export link” between China and Europe gets degraded by depressed European purchasing power, the entire world economy will suffer. It is important that investors focus on the entire impact, not just Europe alone.

Do you have questions about Europe’s impact on your investments? Feel free to call me at (205) 989-3498 or email me here.

Ashley Page
Senior Vice President
Wealth Consultant

Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.

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