What If Fear of Recession in Europe Is Premature?
Tuesday, December 20, 2011. 9.30 a.m. The debt crisis in Europe has been accurately described as mainly a crisis of confidence in markets. As the crisis spread and efforts to solve it were inept, markets became more and more worried. Institutional investors refused to buy the bonds of Greece, Italy, and even Spain unless those [...]

Tuesday, December 20, 2011. 9.30 a.m.

The debt crisis in Europe has been accurately described as mainly a crisis of confidence in markets.

As the crisis spread and efforts to solve it were inept, markets became more and more worried. Institutional investors refused to buy the bonds of Greece, Italy, and even Spain unless those countries enticed them with very costly high yields. Banks are reluctant to make loans to consumers, businesses, and even to each other as recession fears grew, and they worried about getting paid back.

A few months ago concerns began to rise that the debt and economic problems in Greece and Italy would spread through the European continent, even to the largest economies of Germany, France and the U.K., slowing all of Europe into a recession, which could then spread to Europe’s trading partners around the world, and result in a global recession.

A month or so ago the first part of that scenario became a foregone conclusion, with an official at the International Monetary Fund saying a recession in Europe had become unavoidable. Analysts jumped on the bandwagon and the headlines since have left no room for doubt. Europe is headed into recession if it’s not already there.

Those headlines have had the ‘crisis of confidence in markets’ feeding on itself, each week’s headlines crushing eurozone bonds and global stock markets further.

European officials have also been pouring accelerant on the flames even as they work to come up with plans to contain the crisis. Recognizing that much of the problem is a lack of confidence in markets, they still seem unable to refrain from making negative remarks and assessments that knock down any hope for success that begins to rise in markets.

But what if the gloom and doom has been overdone? What if a severe recession in Europe is not inevitable?

Analysts are beginning to soften their outlook, talk turning to a ‘mild recession’ in Europe is unavoidable, or caveats being added that a European recession is unavoidable ‘if’ Europe doesn’t get its act together, or ‘if’ the economic recovery in the U.S. falters again, and so on.

And now in recent days we’ve seen some hopeful signs in European economic reports, and positive actions by European leaders and policy makers.    

This morning it was reported that the Ifo German business confidence Index rose sharply in December, opposed to forecasts that it would decline sharply and confirm Germany was sliding into recession. It prompted an Ifo official to say “At the moment I don’t think Germany will fall into recession again.” He noted the unexpected improvement in retailing and construction in particular.

And Spain’s auction of three-month and six-month bonds went off much better than expected, their financing costs (yields) falling.

Analysts say that the European Central Bank’s decision announced last week to offer banks unlimited amounts of low-cost three-year loans may be starting to work, encouraging institutions to borrow from the ECB at low cost and buy high-yielding Spanish and Italian bonds. 

In additional news, eurozone ministers agreed yesterday to boost the IMF’s resources by an additional 150 billion euros.

And on this side of the ocean, the economic recovery in the U.S. continues to surprise on the positive side.

The two major driving forces of the economy are the housing industry and the auto makers.

Yesterday, the Financial Times reported that the global auto industry grew to record size in 2011 despite the hit to supplies by the Japan earthquake/tsunami, and the eurozone debt crisis. Analysts forecast the growth will continue next year, fed by the pent-up demand during the Great Recession. And the recovering car market in the U.S. saw faster growth (9%) even than the fast growth in China (5%).

And this morning there was another sign of the housing industry having bottomed. New housing starts surged up 9.3% in November, much stronger than the consensus forecast. Construction of multi-family units were up 32.2%, the highest level since April, 2010.

So, what if there isn’t a recession in Europe after all?

It’s looking increasingly possible that the fears have been overdone.

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Yesterday in the U.S. Market.

The market gave up earlier gains to close down on the day.

The Dow closed down 100 points, or 0.8%. The S&P 500 closed down 1.2%. The NYSE Composite closed down 1.3%. The Nasdaq closed down 1.3%. The Nasdaq 100 closed down 1.0%. The Russell 2000 closed down 1.9%. The DJ Transportation Avg. closed down 2.3%. The DJ Utilities Avg closed down 0.9%.

Gold closed down $3 at $1,595 an ounce after rallying briefly above $1,600 earlier.

Oil closed up $0.30 at $93.83 a barrel.

The U.S. dollar etf UUP closed up 0.4%.

The U.S. Treasury bond etf TLT closed up 1.3%.

Yesterday in European Markets.

Markets in Europe closed mixed yesterday. The London FTSE closed down 0.4%. The German DAX closed down 0.5%. France closed up 0.6%.

Asian Markets Closed Mixed Last Night.

The DJ Asia-Pacific Index closed up 0.3%.

Among individual markets last night:

Australia closed down 0.1%. China closed down 0.1%. Hong Kong closed up 0.1%. India closed down 0.7%. Indonesia closed down 0.4%. Japan closed up 0.5%. Malaysia closed down 0.6%. New Zealand closed down 0.6%. South Korea closed up 0.9%. Singapore closed down 0.1%. Taiwan closed up 0.4%. Thailand closed down 0.1%.

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Markets This Morning.

European markets are bouncing back this morning. The London FTSE is up only 0.2%. But Germany’s DAX is up 1.7%. France’s CAC is up 1.6%.

Oil is surging up $2.92 a barrel at $96.80.

Gold is surging up $18 an ounce at $1,615 an ounce, back above $1,600.

This morning in the U.S. Market:

This week will be a quite heavy week for potential market-moving economic reports, especially from Wednesday on, including new housing starts, existing home sales, another revision to 3rd quarter GDP, and Durable Goods Orders. To see the full list click here, and look at the left side of the page it takes you to.

Yesterday’s report was that the NAHB Housing Market Index, which measures the confidence of the nation’s home-builders, rose from 19 in November to 21 in December, the third straight monthly increase, and now at a 17-month high.

This morning’s report was that New Housing Starts surged up 9.3% in November.

Our Pre-Open Indicators:

Our pre-open indicators are pointing to the Dow being up 150 points or so in the early going.

To read my weekend newspaper column ‘The Truth About Election Years!’ Click here.

Subscribers to Street Smart Report: In addition to the charts and analysis in the Premium Content area of this blog, the new issue of the newsletter will be available some time tomorrow in the subscriber area of the Street Smart Report website.

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I’ll be back Thursday morning with the regular Thursday morning post, at 9:25 a.m. (This blog appears every Tuesday, Thursday, and Saturday morning!).

**** End of Today’s post*****

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