Market Overview

French and German Economies Perform Better Than Expected

For once there was good news coming out of Europe when France and Germany reported better than expected fourth quarter economic results.

Although Germany's economy shrank by 0.2 percent, it was less than the 0.3 percent contraction that was widely expected. Germany also had its third quarter growth rate revised upward to 0.6 percent, from the previously reported rate of 0.5 percent.

Most economists feel that Germany will be able to avoid a recession but that the country's first quarter growth will be weak. Still, falling unemployment numbers and improving investor confidence could put Germany back on the path to healthy economic growth.

France also surprised the market with an economic growth rate of 0.2 percent. The better than expected growth rate was particularly good news for France because many economists actually thought that its economy would shrink during the fourth quarter.

The news that the French economy was growing instead of shrinking came a day after the country was warned by Moody's Investors Service that the credit rating agency might soon downgrade France's triple A credit rating. France already lost one of its its triple A credit ratings when Standard and Poor's downgraded French debt last month.

Although confidence in France has been low, the fact that its economy was able to avoid shrinking on the strength of growth in exports and business investment should improve the country's economic outlook. The better than expected results could also improve President Nicolas Sarkozy's chances of reelection. If Sarkozy were to be reelected, it could bolster market confidence in European leaders' ability to deal with the current financial crisis because investors wouldn't have to worry about France abruptly changing any of its positions on how to fix Europe's financial problems.

While the Eurozone's debt crisis has already caused countries like Greece, Portugal and Italy to fall into recession, the news that the Eurozone's two biggest economies performed better than expected during the fourth quarter should come as welcome news to investors. Germany and France are crucial to any solution to the Eurozone's financial crisis, so the fact that their economies are doing better than expected could help give market confidence in Europe a much needed boost.

If the Eurozone can avoid any shocks like a Greek default and the French and German economies continue to improve, the world will be much closer to avoiding a possible financial meltdown.


ACTION ITEMS:

Bullish:
Traders who believe that the better than expected economic performance from the Eurozone's two biggest economies is a positive sign might want to consider the following trades:
  • European banking stocks like Deutsche Bank (NYSE: DB), Banco Santander (NYSE: STD) and Credit Suisse Group (NYSE: CS) could move higher if the Eurozone manages to avoid any defaults and economic performance improves.
  • The CurrencyShares Euro Trust (NYSE: FXE) could also see its share price rise if confidence in Eurozone economies improves.
Bearish:
Traders who believe that the better than expected fourth quarter performances were a fluke may consider alternative positions:
  • The ProShares UltraShort Euro (NYSE: EUO) ETF could be a profitable investment if the fourth quarter performance can't be improved upon. There's still a very real chance that Greece will eventually default and there are plenty of other possible events that could set Europe's economic performance back.
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.

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