Global Economies Waving a Red Flag

By Wednesday, August 29, 2012

Global Economies Waving a Red FlagIt’s amazing how the S&P 500 is managing to hold amid the low volume and high global risk. There’s a sense that traders are expecting the Federal Reserve and European Central Bank (ECB) to come in and offer massive monetary stimulus to drive their respective economies. I don’t think it will happen this way, but clearly, something needs to be done and soon.

The warning signs are evident, as the stalling in the global economies remains a key risk factor.

Spain’s recession picked up steam in the second quarter with gross domestic product (GDP) contracting 0.4% quarter-on-quarter, according to the country’s statistical office. GDP growth in the first quarter fell 0.6% year-on-year. As I have said in my previous commentaries, Spain is in a mess, hampered by high debt, surging and unsustainable high bond yields, declining growth, and an unemployment rate of close to 25%. Spain will likely require a full bailout to avoid a collapse in the eurozone.

A big concern is that the lack of growth is also impacting the eurozone’s two largest members. Germany continues to show stalling. The country’s Ifo index, representing a survey of 7,000 German firms on their views towards the economic conditions, came in at its lowest level since August 2010. The weakness in Germany will pressure the eurozone and the desire of the country to continue to want to bail out the weaker countries.

Capital Economics suggested France and Germany will face another recession in 2013. The news is not what you want to hear, especially given the current financial mess and the absence of a resolution to deal with the situation in the eurozone and specifically Spain.

Already six of the eurozone countries are grappling with a recession.

Italy just reported its fourth straight quarter of contraction.

The German Bundesbank is questioning the ECB’s strategy towards the mess in the eurozone.

What is ECB President Mario Draghi going to do? We will likely find out on September 6, when the European policymakers meet to discuss the proposed bond-buying strategy for the eurozone. Given this, Draghi cancelled his appearance at the annual meeting of central bankers slated for Jackson Hole at the end of this week due to what was a heavy workload!

As I said on numerous occasions, the grave situation in Europe will continue to pose global issues.

I continue to feel the market is underestimating the eurozone mess.

And then you also have a growing and potential crisis in Asia due to the impact of economic slowing in Europe and the eurozone. The HSBC Manufacturing Purchasing Managers’ Index (PMI) for China came in at a nine-month low of 47.8, which indicates the country’s economy is continuing to slow.

According to Bloomberg, of the 488 companies in the MSCI Asia Pacific Index that have reported since July 1, over 50% have been short.

Japan reported continued stalling, driven by the concurrent slowing in Chinese demand. The country cut its outlook towards its economy, including personal consumption, home-building, exports, imports, and industrial production, according to the Cabinet Office in Tokyo. (Read about the continued mess in Japan in “Japanese Economy Remains in a Comatose State.”)

The global risk is high, and you need to be concerned.

About the Author, Browse George Leong's Articles

George Leong is a senior editor at Lombardi Financial. He has been involved in analyzing the stock markets for two decades, employing both fundamental and technical analysis. His overall market timing and trading knowledge are extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi Financial’s popular financial newsletters, including Red-Hot Small-Caps, Lombardi’s Special Situations, Judgment Day Profit Letter, Pennies to Millions, and 100% Letter. He is also the editor-in-chief of a... Read Full Bio »