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ETF Periscope: A French Connection To the Eurozone’s Fate

Posted on the 23 April 2012 by Phil's Stock World @philstockworld

“He who controls others may be powerful, but he who has mastered himself is mightier still.” – Lao Tzu

ETF Periscope: A French Connection To the Eurozone’s Fate
There is no doubt that this week will be strongly impacted by the sheer volume of S&P 500 companies reporting earnings over the course of the coming week. However, the longer term direction of Wall Street is more likely to be impacted by Sunday’s election in France.

Investors will definitely be paying close attention to the corporate earnings reports that will be announced by about one-third of the S&P 500 companies throughout the week. So far, earnings season has been regarded as upbeat, as the majority of reports have come in slightly above expectations. Should this trend continue, Wall Street might resume its Q1 rise, based more or less on the fundamentals of the market.

However, even positive corporate numbers may not be enough to trump the perception of risk that investors hold of the Eurozone situation.

On Sunday, France goes to the polls to vote on a new president. The expectations are that Nicolas Sarkozy will end up in a runoff with the more left-leaning Francois Hollande, and a May 6th runoff shall follow.

What is of significance to investors in this election is not just who will end up steering France’s government, but what it represents to Europe on the larger scale.

If Hollande is the ultimate victor, it means that the French electorate is responding to, among other things, his calls for more taxes on the rich to help generate an increase in government-sponsored jobs, as well as his position that there should be fewer budgetary cuts. In other words, more growth, less austerity.

This is, to a large degree, the same drama that is being played out in Greece, as well as Spain. With the majority of the PIIGS (Portugal, Ireland, Italy, Spain and Greece) either in recession or tottering on the precipice of one, the issue of growth versus austerity is now the predominant question of the day. How the French elections play out may serve to give an accurate read on the direction the EU shall be heading.

If the austerity advocates continue to prevail, the result might be additional bailouts to Greece, Portugal, and Ireland, and future bailouts for Spain and Italy. If pro-growth advocates assume power in the next round of elections throughout the Eurozone, then lenders may balk at providing additional funds and defaults become inevitable.

The International Monetary Fund (IMF) has just secured pledges of an additional $430 billion from the leading world economies. The IMF now has to shore up one trillion dollars worth of potential liquidity and sovereign debt issues within the EU.

In spite of that staggering figure, the Spanish bond market still suffered. Its 10-year bonds hit the 6% level, hardly a ringing endorsement for the future of Spain’s economy. The fact is there may simply not be a large enough amount of money available to sustain the current form of the Eurozone. The structural changes, which are probably required to create a viable EU, may be beyond what investors are willing to support.

ETF Periscope

Full disclosure:  The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

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