Spain technically blundered into its second recession since 2009 in the first quarter and the country appears to be ravaged by heavy debt and muted growth. The Spanish government is trying to cut the budget deficit, but, with the country’s jobless rate at near 25%, it will not be easy based on my market view. The country’s gross domestic product (GDP) is predicted to contract 1.7% this year and expand an anemic 0.2% in 2013, with the unemployment rate stuck at around 24%.
And like Greece and Italy (some of the other PIIGS), my market view is that Spain will need aggressive austerity measures to put the country back on track. It will not be easy and the concern is that, with Spain being the ninth largest economy in the world, fallout here will be devastating to Spain and the rest of the world, according to my market view. Monitor the Spanish Bond Auction that showed the 10-year yield at 5.80%. A move to above six percent would be a red flag and, if yields rise to seven percent, my market view says watch out.
In all, my market view is that the world economies have changed dramatically since September as a result of the sharp slowdown in Europe’s growth along with the unrest and political turmoil in the Middle East and North African region. The economic prospects are gradually strengthening, according to my market view, as a result of the better policy steps in the eurozone and improved activity in the U.S. where the growth is rising and unemployment is falling, but there is still real risk to deal with. Don’t tell the roughly 13 million unemployed Americans that things are better, as I discussed in The Good Times Are Here? Tell That to the Unemployed.
In this election year, President Obama still needs to deal with economic risk, the massive national debt, and struggling deficit levels in some states.
My market view is that the outlook for emerging Asia remains strong due to improving domestic consumption, along with lower inflation and external current account surplus.
In Asia, the decision by the Bank of China to increase the trading band for the renminbi, allowing market forces to play a greater role in determining the level of the exchange rate, looks to be a big step in the right direction, according to my market view. The real effective exchange rate in China has appreciated by around seven percent in the last 12 months, signaling a shift from investment-led to consumption-led growth in the world’s fastest growing economy.
India also surprised the market participants when the Reserve Bank of India cut interest rates by 50 basis points instead of the widely expected 25 basis points at its recent monetary policy meeting.
These events have provided some relief to the financial markets along with reducing the threat of sharp global slowdown, yet the downside risks remain elevated due to high liquidity needs to strengthen the capital cushions and rollover requirements of the European banks.
According to the Global Financial Stability Report, large European Union based banks could shrink their combined balance sheet to $2.6 trillion by end of 2013, resulting in reduction in lending and sale of non-core assets.
Then we have the Middle East. Saddam Hussein and Obama bin Laden may be gone, but my market view is that the risk from this area is prevalent. The unrest in the Middle East is being closely monitored by the market participants. The situation in Syria continues to remain frightening, as the unrest persists. As per the latest media releases, Russia has halted deliveries of light arms to Syria to avoid conflicts between the government forces and the opposition groups. Moreover, Syria is willing to allow UN observers to use its helicopters when necessary to evacuate wounded people.
My market view is that, before you stash your capital in stocks, just be aware that the global risk remains.
Global Market Risk: Is it Improving? was last modified: May 2nd, 2012 by George Leong, B.Comm.
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 »
Forecasts Aug. 28, 2015
Immediate term outlook:
The bear market rally in stocks that started in March 2009, extended because of unprecedented central bank money printing, is coming to an end. Gold bullion is up $1,000 an ounce since we first recommended it in 2002 and we are still bullish on the physical metal.
Short-to-medium term outlook:
World economies are entering their slowest growth period since 2009. The Chinese economy grew last year at its slowest pace in 24 years. Japan is in recession. The eurozone is in depression. With almost half the S&P 500 companies deriving revenue outside the U.S., slower world economic growth will negatively impact revenue and earnings growth of American companies. Domestically, America’s gross domestic product grew by only a meager 2.3% in the second quarter, which will negatively impact an already overpriced equity market.
Estimates Aug. 28, 2015
Trailing 12-month EPS for Dow Jones companies (Most Recent Quarter)