07|11|2016

European Recession?

 US markets advanced last week while the European outlook has continued to deteriorate.

 

Jobs Report
The June jobs report was much stronger than expected. The May report which only showed an addition of 38,000 jobs was revised down to 11,000, which is a dramatic stall of the employment markets. They, however were buoyed by a June report that showed 287,000 jobs added, well above the 175,000 expected. Meanwhile the unemployment rate increased .2% to 4.9%[1]. Much of which was the result of an increase in the participation rate. Often times the number of people searching for a job can increase over optimism in employment opportunities.

 

The strong jobs report brought markets with in reaching distance of all-time highs, last seen in early 2015. The sustainability of these equity levels will likely be tested by 2nd quarter earnings.

 

Italy
The banking environment has become very tense in Italy as they have shed over half their value year to date[2]. The recent ‘Brexit’ vote has escalated concerns over bad lending from the Italian banking sector.

 

United Kingdom
The recent vote in England resulted in the United Kingdom deciding to exit the European Union. This decision had an immediate negative impact on the markets followed by a strong rebound. The reality is that the effects of the ‘Brexit’ is going to take a long time to be felt.

 

We should be able to enjoy an earnings season that mostly saw a falling dollar, until the last week of the quarter, thanks to ‘Brexit’.

 

Conclusion
The bigger risk lies in the fact that a recession may be looming for not only the United Kingdom, but for the EU as a whole. Between the fall out related to the ‘Brexit’, banking concerns in Italy, and the ever present wild card that is Greece, the likelihood of a European recession is increasing. Should we see a European recession, the € would slide dramatically against the $. This would make profitability more difficult for large multinational US companies

 

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[1] www.investing,com – economic calendar

[2] www.troweprice.com – global markets weekly wrap up