Tags: EU | worries | uncertainty | eurozone

Despite Sandy, European Worries Still Remain Top Uncertainty

By    |   Tuesday, 30 October 2012 11:43 AM

It’s certainly way too early to have a realistic assessment of the overall direct and broad collateral damage Hurricane Sandy has caused. One thing is for sure, it will cost a lot more than first estimates would suggest. Its direct impact on the still fragile U.S. recovery should be only limited, but destruction remains destruction, no doubt about that.

In the meantime, the dominating "uncertainties" in the world remain well in place. It’s certainly no surprise that European worries remain on top of all uncertainties, notwithstanding eurozone officialdom relentlessly seeing the eurozone through its politically motivated rose-tinted lenses. The just-released Eurozone Economic Sentiment Indicator for October doesn’t provide any relief, as it fell to its lowest level since October 2009.

Besides, in accordance to all data available so far, it looks like Europe’s economy continues to contract and probably will continue to shrink in the third quarter, after having contracted by 0.2 percent in the second quarter. If that is the case, that means the eurozone goes back into a recession for the first time since the last one in 2009.

Unemployment remains at record highs since the eurozone was created with no relief in side. By the way, last week, Spanish unemployment hit a record high rate of 25 percent in the third quarter, which was up from 24.6 percent in the second quarter and means that “officially” 5.8 million people were without a job in Spain. Spain had 47,150,819 inhabitants according to 2010 municipal records. I’m sorry, but I still can’t understand how there is, besides the EU officialdom, anybody out there who can be optimistic on the future of the eurozone remaining under its actual structure and composition. The latest Markit Flash Eurozone Purchasing Managers’ Index (PMI) Composite Output Index came in at 45.8, a 40-month low and indicating the downturn is deepening in the eurozone.

For China, the latest HSBC Flash Manufacturing PMI, with data collected through Oct. 22, remained in contraction territory at 49.1 for October, compared with 47.9 in September. In my opinion, that should mean China will keep its policy easing in the foreseeable future and Chinese authorities will do whatever it takes to avoid a hard landing.

In the United States, the economy continues growing, albeit way too slow to bring unemployment down in a sustainable way. Crucially important upcoming events in the United States could turn out being true game changers in the foreseeable future for the United States, as well as for the world as a whole.

Next week we have the presidential elections, and before the year is out we have the threat of the fiscal cliff. Only time will tell us where we are heading.

That said, I’m still convinced we’re in most of the markets in a “top-zone.” As I said here earlier, I don’t know what the catalyst(s) could be for igniting the descent(s). In case we do, I don’t expect going down in a straight line.

As I see it today, there are some key values to keep an eye on:

• As far as the euro is concerned, the $1.26 per euro “zone” should be an important key level to the downside. Keep in mind the euro problems have not disappeared.

• The dollar index could well move up during the next 12 months to the 92 zone, while we are now trading around 80.

• Taking into account the 60-year U.S. interest rate cycle, I have no doubt we are in the topping zone for U.S. 30-year Treasury. We should see from here on a bias developing to rising interest rates and falling Treasury prices. Please take care, this won’t happen overnight as this will use in full the 30 years of the upward yield slope of the 60-year cycle.

• Putting geopolitical risks aside for moment, I still expect oil could move down to the lower $70s in 2013 strictly based on “fundamentals.”

• On the broader stock markets, I still expect a decline, while we’ll still have to be patient for a couple of years for the really "big" decline, which probably could easily turn out to be very nasty if not disastrous for the buy-and-hold type portfolios. No, it’s not “The day after tomorrow” type situation, yet.

• As far as war is concerned, I’m still convinced the first half of 2013 will be extremely important.

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It’s certainly way too early to have a realistic assessment of the overall direct and broad collateral damage Hurricane Sandy has caused. One thing is for sure, it will cost a lot more than first estimates would suggest.
Tuesday, 30 October 2012 11:43 AM
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