Why We Are SHORT Europe/EURO

Here are just a few of the headlines from today:

  • Greek unemployment rose to 12.2 percent in August from 12 percent in July, the highest since monthly data was first reported in 2004.
  • The U.K. consumer confidence index fell 1 point in October to 52, the lowest since March 2009.
    The euro-area economy grew 0.4 percent in the third quarter from the second, when it expanded 1 percent.
  • Industrial output fell 0.9 percent in September from August.
    German economic growth slowed in the third quarter to 0.7 percent from the previous period, when it surged a record 2.3 percent. From a year earlier, output rose 3.9 percent.
  • The French economy grew 0.4 percent in the third quarter, slowing from a 0.7 percent pace in the previous three months.

Along with these, we have laid out a framework of how there will be limited ability for the Eurozone to move ahead with the current austerity measures.   Below is a small excerpt from our recent commentary to our clients. It provides some of the backround and results of the Euro crisis. (Note – this is only a few pieces from a much longer commentary):

In the beginning of 2010, when the Euro reached its low point against major currencies, importers looks at the lower pricing on good from the EuroZone (due to the currency weakness) as an opportunity to buy goods at a markdown.   This resulted in the Euro Purchasing Managers Index (PMI) seeing a nice increase. Even more astonishing was the boost that Germany experienced in the most recent quarter‘s exports, just as austerity measures were beginning to kick-in throughout the Euro region.

Over the past two months, the Euro has appreciated markedly. At the same time, economic reports are showing that a slowdown is rather evident as we enter the fourth and final quarter of 2010. The latest data points indicate that GDP for the region may only reach 0.2 percent on a quarterly basis for the fourth quarter.   Combine that with a low level of industrial orders and we are set for some very strong headwinds for the region.

Consider that Ireland is now on the brink of failure and Portugal may not be that much further behind. Already there are murmurs circulating that a bailout of the Irish debt is forthcoming and a restructuring will not be necessary. We shall see….