Eurozone Crisis Is Far From Over

Tuesday, 20 Aug 2013 12:30 PM

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Eurostat's flash estimate for the eurozone's second-quarter gross domestic product (GDP) showed a positive growth of 0.3 percent quarter-over-quarter, but "seasonally adjusted" it was still 0.7 percent below the same quarter in 2012 when the eurozone was still in recession. While the number is "less bad" in my opinion than during the first quarter, it's way too early to say growth is sustainably back. In sharp contrast, markets signaled immediately their classical "short-sighted" signs of over-hyped/orchestrated EU optimism.

Because the eurozone is and remains extremely important to the whole global investor community, as a long-term investor, I'd prefer to remain extremely cautious on everything related to the eurozone while keeping in mind the crisis is far from over.

By comparison, the second-quarter GDP growth in the United States came in at 0.4 percent quarter-over-quarter, and 1.4 percent compared with the same quarter of 2012.

It's way too early to get overly optimistic on the growth prospects of the eurozone and I have serious doubts the positive growth numbers we've seen for the second quarter were mainly driven by temporary growth drivers like the weather-related upturn and a record 15.7 percent jump in car output. Therefore, they have a good chance being repeated in the third quarter.

Interestingly, last week at an election campaign rally, German Chancellor Angela Merkel said in clear German that the eurozone crisis is "not over." She admitted the eurozone growth figures were "good' news," but noted that the "zone" needed to ensure that growth was not enhanced through more debt (her we go again!), as this could cause again a spiral that leads to unemployment.

Also noteworthy, Germany's Chambers of Commerce released its "World Economic Report 2013-2014," wherein it forecasts German export growth will slow down this year to 2 percent from 3.4 percent in 2012, which lags their 2013 projected 3.8 percent rise in global trade. No, that's not an expected stellar performance. Also yesterday and today, Germany's Minister for Finance Wolfgang Schauble said at several election campaign rallies he expects German 2013 GDP growth to be somewhere in the 0.5 to 0.7 percent zone.

I'm afraid the second-quarter GDP growth number for the eurozone, with what we know today, clearly "overstates" the real "economical health" of the eurozone as a whole. Nevertheless, it also must be said there's little doubt that the euro area is slowly mending, which is an undeniable positive.

In the meantime, we continue to see the euro showing a remarkable insensitivity to the persistent underlying problems in the eurozone. In my opinion, long-term investors could do well not sharing actual market optimism on the euro e.g. in relation to the dollar (EUR/USD) and certainly not negating the non-abated lingering structural problems the eurozone continues to face. Nobody can deny there remain too many potential "mishaps" lurking under the surface that could re-surface at any time like the Italian and Spanish "unstable" political situations, Greece's permanently revolving "black hole" that will have to be filled one way or another over and over again and Portugal's perilous economic situation.

It's certainly helpful to take notice that when we look at the money-flow data as observed in New York we see recently only very little "real" money inflows into the higher-yielding government bonds like those of Italy, Spain and Portugal. Their latest respective 10-year yields were as follows: Italy at 4.266 percent, Spain at 4.41 percent and Portugal at 6.293 percent, while the U.S. 10-year yielded 2.883 percent.

In my opinion, the relative euro strength we've seen as lately in the EUR/USD is for a serious part the result of the speculative search mostly by institutional and not as much by private investors for yields that have seen buying eurozone "peripheral" government debt.

Please don't misunderstand me. Yes, this search for yield could easily continue into September or October, which could, but in my view only temporarily, further underpin the euro with respect to the dollar.

In case that would be the case, we'll have to wait for a disruptive event to occur sometime in September or October like a renewed crisis in Greece, but also even the announcement of the new Federal Reserve chairman or, hopefully not!, a serious incident that heavily impacts the Suez Canal, where about 7 percent of all seaborne traded oil and 13 percent of liquefied natural gas (LNG) passed through in 2012 that was Europe and North America bound or whatever other geopolitical/economical/financial disruptive event(s) that develops.

Maybe not such a bad idea for the long-term investor also to take notice of the fact Monday in Italy, the leader of Silvio Berlusconi's PDL party in the Senate, Renato Schifani said it would become "impossible" for the actual ruling "grand coalition" to remain in place if the center-left Democratic Party of the actual Prime Minister Enrico Letta should vote to expel Berlusconi from parliament in "September." Believe me, he was not joking…

Of course, everybody has to decide for him/herself if any of all these kinds of risks should be taken into account. To me it's clear that holding euros instead of U.S. dollars is a question of "Caveat emptor" or "Let the buyer (of euros) beware."

I personally, but that's not an advice, would further accumulate dollars at any sudden sign (volatility/sudden coverings of long/short positions, etc.) of pronounced dollar weakness, which is still possible.

Besides that, I also keep my positive expectations on the Swiss franc, certainly once it's (CHF) decoupled from the euro, and the Norwegian kroner, especially as hedges against the broad variety of geopolitical risks that are out there and that won't go away anytime soon.

Finally, my overall preference remains dollar-denominated short-term U.S. Treasurys "cash" equivalents, as I still expect a correction. Once the correction is underway I'll try to find "buying windows" on the way down, for the very simple reason the path will be "uneven."

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