One potentially negative catalyst out over the horizon — one that you don’t hear much about yet — is the troubles Europe faces now that its currency has gained 17% since June.
It was a big devaluation in the euro that got Europe out of its sovereign debt crisis earlier in the year by boosting export competitiveness and helping the core eurozone economies, especially Germany, put in very impressive Q2 GDP growth numbers. Indeed, the entire eurozone grew 1% on a quarter-over-quarter basis compared to the 0.3% growth seen in Q1 when the euro was trading at the same levels it is now.
This relationship between currency valuation and exports was the reason I turned bullish on Europe in the depths of the crisis in late May. I urged readers to be bold and snap up the shares of European companies either directly or through ETFs like the iShares Germany (NYSE: EWG), which is up 24% since that column was published.
The euro depreciation fueled Q2 growth spurt helped paper over the still-serious issues faced by the peripheral countries of Greece, Ireland, Portugal and Spain as they engage in fiscal austerity measures and major economic reforms. Make no mistake: These countries are not yet done repenting for their years of budgetary hedonism enabled by easy credit.
Although Europe’s leaders were able to cobble together a few assistance programs, a long-term solution to the troubles facing the eurozone have not been resolved. How does a monetary union enforced fiscal discipline on its members? How much austerity will the citizens of the periphery nations accept? The summertime rally didn’t answer these questions; it merely postponed the reckoning.
In many ways, there are similarities to the Bear Stearns collapse in early 2008 and the full-on credit crisis of later that year. People though the problem in sub-prime mortgages had been “contained” and that the financial system didn’t face systemic risks. But it did. And Lehman’s collapse confirmed it.
The recent downgrade of Ireland’s debt rating I believe marks just the beginning of a new wave of concerns for Europe as Q3 and Q4 GDP growth there will come under pressure from the lofty euro and lost export activity. As a result, the euro and European stocks are likely headed for another round of selling.
To take advantage of the falling currency, be sure to check out the ProShares UltraShort Euro (NYSE: EUO) which returns twice the inverse daily return of the dollar price of the euro. For exposure to European equities, take a look at the ProShares UltraShort MSCI Europe (NYSE: EPV), which returns twice the inverse return of the MSCI Europe Index.
Disclosure: The author does not own or control a position in any company mentioned.
Be sure to check out Anthony’s new investment advisory service, the Edge. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.
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