a Different perspecitve on Capital markets

The European crisis has been “forgotten” in the eyes of the investment community. in the last few months, the Euro has been rising significantly, Stock markets in Spain and Italy have risen dramatically as well.

IBEX - the spanish stock market index - staging an impressive rally

IBEX – the spanish stock market index – staging an impressive rally

In the Davos convention – economists from all over the world have declared “the end of the Euro crisis” , Public servants as well

But if that is so, now is the time to DOUBT that recovery, and focus mainly on the core countries.

we already know that Spain unemployment is HUGE, official number is 26%, and who knows what the real number is. we also know Italy has huge debt problems, and Greece will probably never pay its debt, even after the “haircut” done to its creditors.

Now we should pay more attention to what’s happening in the core countries , where the positives and the economic powers are at

UK

The United Kingdom has been through a rough path in the last few years as it’s been printing money (QE) for a long time and results are not apparent, even in the CPI. the last quarter of 2012 printed negative GDP of 0.3% although the interest rate is practically negative and billions of pounds are injected to the market through the whole year

GERMANY

The real power house of europe – Germany, has also shown signs of weakness. GDP growth has also contracted there 0.5% and also CPI numbers were very low compared to the numbers expected. that is with extremely low-interest rates and an ECB printing money to bail out failing countries and buying their government bonds.

FRANCE

The only country showing better  results in official numbers, has other problems. The new president is a socialist, who is pushing to raise taxes on the wealthy and by that driving them away. surveys show a majority of the public in france think their country is broke.

France government bonds yields have dropped in the last few months in the “Euro area is recovering” era, and as we can see the  behavior of those bonds is more similar to Spain and Italy, the dangerous ones, than to Germany, US and UK the “safer” ones.

US yields go up during the rally while french yields are pressured Down as risky assets

US yields go up during the rally while french yields are pressured Down as risky assets.
Green is US yields and orange is French yields
Source : Bloomberg

As it seems, at least to me, france is becoming a peripheral country in the eyes of the markets, and with yields climbing in Spain and Italy there will be no mercy for France.

Peripheral Countries

in Spain, nothing dramatic has improved. unemployment is still high, debt is still big, and GDP is contracting. the same goes for italy, that probably has less problems but not smaller problems.

the Greek stock market made a comeback, but now seems dangerous again, as Fascists start rallying the country, and no real economic improvement has been seen in this country for the past 3 years.

Overall

An interesting data point is RETAIL SALES for the whole Euro zone, fell 3.4% Y/Y, a lot more than expected.

So it seems , that the European problems are now spreading to the core countries, as deflation, contraction and general weakness become the new best description for the present state.

This era of weakness in the core will be a lot harder to counter and deal with, especially after all of the money spent on peripherals

Good luck in your investments

Tomer

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