It’s bad enough that we are facing a colossal U.S. debt of close to $15.0 trillion—and expected to get bigger—but the European debt crisis is also a major mess and could easily worsen.
I have often talked about Europe and particularly the eurozone and the massive hurdles the region faces going forward. The grave situation overseas is real and is not going away anytime soon. This will impact trading here and add to the overall stock market risk.
We’ve seen the departures of both the Greek and Italian leaders, but it’s going to take a lot more to resolve the European debt crisis. There is talk now that policymakers in Europe are warning that the European debt crisis is spreading to the larger eurozone countries and will pose significant dangers to not only Europe, but also the other global economies.
We have Germany and France—the two biggest funders of emergency capital for the European debt crisis—debating on the role of the European Central Bank. This should not be a surprise, as Germany and France have watched their economies tank while focusing on the weaker members of the eurozone.
At this juncture, the eurozone is on the verge of another potential recession. The probability of another recession in the eurozone is 40%, according to a poll conducted by Reuters.
Growth in the eurozone was a dismal 0.2% for the third quarter, as the European debt crisis is clearly impacting growth. Factories in the eurozone have contracted for three straight months. The Flash Markit Eurozone Services Purchasing Managers’ Index (PMI) is contracting at 47.2 in October, down from a 48.8 reading in September, and short of the estimate of 48.5.
The rising bond yields are a sign of trouble ahead, which will make it more difficult to sell debt and pay back loans given the European debt crisis.
For instance, the yield on the Italian 10-year bond is above seven percent. Where is Italy going to find the money to pay these high yields? But the yields are high, as investors have to receive higher yields to compensate for the higher risk of carrying the bonds. When Greece was near default, the yield on its one-year bond was over 90%.
Then we have Spain bond yields at around 6.22%. France, the Netherlands, and Austria are also seeing higher yields, an indication that the European debt crisis is spreading.
Remember that, when bond yields broke above seven percent in Greece, Portugal and Ireland, it indicated trouble and eventually resulted in an emergency bailout.
This is not to suggest that Italy and Spain are in the same boat, but if the muted growth in the eurozone continues and the European debt crisis spreads, it could happen. What is disturbing is that Italy and Spain are major eurozone and global countries based on their respective GDP.
My view is that the debt crisis, deficit, and stalling growth issues cannot continue much longer; otherwise Europe will falter and fall into a deeper or new recession.
Given the downside risk, you should hedge via put options, as I discussed in How to Survive During This Economic Chaos.
In technology, I continue to feel that Apple Inc. (NASDAQ/AAPL) is the “best of breed” in spite of the recent passing of Steve Jobs. You can read my thinking in Apple Is Shining Bright…RIM, Not So Much