Monday, June 11, 2012

What You Need To Know About The Euro Zone

Stocks have continued to fall as investors remain worried about Europe's anemic state of economy.  Even with an aid package to boost Spain's banks the market has not shown faith and is looking over to Greece and the highly anticipated outcome of the elections on June 17.  Whether Greece remains in the euro zone or not the world economy is slowing down and drastic measures need to be implemented to bring confidence back to the market.  One thing to keep in mind is that violence is not the answer even if unemployment in Greece hovers at 21.90%. 

Despite the 2008-09 recession the euro area went on to experience moderate GDP growth in 2010-11 according to the World Factbook.  The euro area's GDP value makes up about 20.09% of the world economy according to the World Bank.  That is why the EU is so important to the rest of the world and why oil prices have dropped steadily.  Nations anticipated the impact of the 2008 recession and it brought commodity prices to its knees.  Commodity prices dropped heavily during the 2008 recession and commodity indices experienced more volatility than that seen on 9/11/01.  The year 2011 did not end well as the sovereign debt crisis became a nightmare for the world and is now the European Union's top economical and political concern.  The bigger risks that face the bloc are an aging population, high debt load and the fear of debt crisis contagion which already has taken place.  Unemployment rate in the zone was last reported in April at 11% and inflation is at 2.60% with interest rates at 1.00%.

The last month has been negative for the Euro STOXX 50 a major stock index which tracks large companies in the euro area.  It last traded in the red at 2137.70 one of the top performers for the day was Bayer AG a healthcare company that produces central nervous system drugs as well as aspirin.

Although the euro zone has taken measures such as boosting funds it has clearly not been enough and more needs to be done to stimulate spending.  Experts have suggested more stimulus not only to the EU but to the rest of the countries that pose a risk to the global economy. 

How should investors play this European crisis? With the euro trading at 1.2479 and expected to drop lower shorting it can be one option if this is too risky for some then going with an ETF may be a better option.  Stocks have continued to drop as a result of the crisis whether the companies have direct exposure to Europe or not.  Most companies are trying to reduce their European exposure which is a sign that investors should be doing the same.  Banks have also been hit pretty hard.  Even healthcare HMO's like Centene Corp. (CNC) dropped today with overall light volume in the NYSE.  Euro zone turmoil is going to be on the news and on the minds of investors for a while, expect no quick fix, best not to look at your 401k neither.  Whether buying stock on these dips or not grab on to your seat belt because it will be a bumpy ride. 

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