Market Overview

2012 Predictions: Is Euro Zone Going to Collapse?

2011 has been an eventful year and is nearing its end, as the U.S. equity markets are currently enjoying a Santa Claus rally. The traders can feel a temporary sense of relief after yesterday's meeting between Germany's Merkel and France's Sarkozy, who finally seem to be finding a consensus on what needs to be done in order to save the Euro Zone.

If the politics in the United States do not get messier, we might be able to enjoy this calm uptrend until the end of the year. However, successful investors always look into the future and prepare their strategies based on the future expectations.

Although the continuing uncertainty seems to be the only certain thing in the future, here are Benzinga's five predictions for Europe in 2012

1. No Massive Euro Zone Break-up

The recent crisis has raised fears about a potential Euro Zone break up that would cause all the European countries to return to their old currencies. Benzinga's prediction is that this will not happen in 2012, 2013, or anytime in the foreseeable future.

First of all, the common currency has existed for a decade now, which has made the average citizens too accustomed to the ability of crossing a boarder (which the Europeans do very often!) and not having to exchange their money to the local currency. Think of it as a Wall Streeter who lives in Connecticut or New Jersey and would have to exchange his or her money in order to buy a lunch in New York. Hence, there would be a strong opposition to any proposals to break-up the entire Euro Zone.

The hypothetical break-up would also face resistance from the businesses that benefit greatly from the ability to trade goods with foreign partners without the need to worry about exchange rate fluctuations.

2. European Stocks Will Rally in the First Half of 2012

As Sarkozy and Merkel seem to finally be reaching a mutual understanding on how to deal with the European crisis, it is likely that the relief rally will last throughout the first half of 2012. Also the European Championship tournament in soccer, which will take place in June and July, might boost the economic activity in Europe and especially benefit the travel and retail sectors.

Keep your eye on the shares of Nike (NYSE: NKE) as it may benefit from the increased demand in soccer gear.

The prediction is that this relief rally might not last past mid-July.

3. Potential Sell-off in the Second Half of 2012

The European Championship tournament tends to boost the economic activity, but soccer is also a major productivity killer in Europe. According to a Huffington Post article, the last soccer world cup cost the British economy about $7.36 billion in productivity. When you add losses like this to the European economy that is already under a lot of pressure, it is possible that we might see another serious downturn and even a double dip recession.

This potential slowdown/recession might last until the end of 2012 and drag the European stocks significantly lower.

4. S&P Will Downgrade France

The sustainability of France's AAA credit rating has been doubted by many traders and investors, especially, after the S&P credit agency “accidentally” sent out an email a couple months ago to some its clients saying that it has downgraded France's sovereign credit rating. S&P quickly announced that the email was a mistake, but the leaked email and the French 10-year yields that have been near 4 percent have made the downgrade seem very likely.

Also, the reports that came our yesterday indicating that S&P has placed the European countries with AAA rating on “creditwatch negative,” are strengthening this prediction.

5. Germany Will Maintain Its AAA Rating

Although Germany was just put on “creditwatch negative” by S&P, it will maintain its AAA rating by all three major credit agencies. The country's economy is very strong despite the European headwinds and problems that its main trading partners have.

Germany is known for its conservative fiscal policies and strong exports that are not depended on only a few trade partners. Hence, it will be able to get through another European slowdown without having its sovereign credit rating cut.

ACTION ITEMS:

Bullish:

  • The traders who believe that the Euro Zone will not break up and European economy will strengthen in the first half of 2012 may want to go long Vanguard MSCI Europe ETF (NYSE: VGK). Also, the European banks, such as, Barclays (NYSE: BCS), Royal Bank of Scotland (NYSE: RBS), and Societe Generale (OTC: SCGLY) might benefit from the stronger economy.

Bearish:

  • The traders, who believe that the Euro Zone is done and the average citizens rather give up the common currency than support the countries that are failing, might want to short the European stocks. One way to do this is to go long ProShares Short MSCI EAFE ETF (NYSE: EFZ).

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

Posted-In: Long Ideas Bonds Short Ideas Futures Forex Economics Markets Trading Ideas Best of Benzinga

 

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