Is Europe’s Pullback an Opportunity?

The news was unrelentingly bad last week in Europe.

Here’s a quick summary of burning Europe:

  • Markit Economics released its Eurozone Composite PMI for April that came in at 46.7, a steep decline from 49.1 in March and worse than expectations to bring the index to a three year low.
  • European ETFs were hit hard last week with Spain, Italy and Germany all suffering weekly losses in the 4-5% range.
  • Upcoming elections in Greece and France threaten to destabilize the political situation in the Eurozone and unravel previously agreed to measures designed to reduce debt and work to a resolution of the ongoing European Financial crisis.
  • Francois Hollande, challenging President Sarkozy, and apparently leading, is calling for a new budget agreement in Europe focusing on growth rather than austerity and lining up for a showdown with German Chancellor Angela Merkel.  If elected, he will be the first Socialist President since Francois Mitterrand came to power in 1995.
  • Greece will choose new political leadership and neither of the main parties is expected to be able to win without a coalition. Local elections in Germany and Italy will exhibit public mood towards their respective national governments and ongoing austerity programs.
  •  Spain’s unemployment continues to be more than troublesome with 25% of the population unemployed and more than 50% unemployment among the country’s youth.  Spanish bonds yields remain elevated as the country struggles to finance its debt.
  • Mario Draghi and the European Central Bank kept its lending rate unchanged at 1% on Thursday but offered no promises of further stimulus which disappointed markets.
  • Recession is spreading across Europe with major players like Denmark, Greece, Ireland, Italy, Spain, Portugal, Netherlands and Britain all in technical recessions defined as two quarters of economic contraction.

Seeking Opportunity in Destruction:

As Europe burns, there are lots of good ways for ETF investors to seek profits.  Here are two straightforward, potentially profitable solutions:

1. Short the Euro.  If problems persist and European leaders aren’t able to get their houses in order, the Euro will likely decline and could even collapse if the zone were to break up.  Potential plays are to short CurrencyShares Euro Trust ETF (NYSEARCA:FXE) or buy ProShares UltraShort Euro ETF (NYSEARCA:EUO):



2. Short Europe.  Opportunities here could be to short any one of the troubled country funds like iShares MSCI Spain ETF (NYSEARCA:EWP) or iShares MSCI Italy ETF (NYSEARCA:EWI). These ETFs are already down sharply (more than 25%) and could have farther to fall if Europe enters a prolonged recession or Depression.  One could also buy an inverse Europe ETF like ProShares Short MSCI EAFE ETF (NYSEARCA:EFZ) which is designed to rise as the EAFE Index declines:


Bottom Line: All of this adds up to a potentially toxic situation, not only for Europe but for the United States, as well, as 25% of S&P 500 profits come from the Eurozone economies and the zone, taken in aggregate, is the world’s largest economy.  However, as always, ETF investors can make profits from any situation, and currently Europe ETFs offer potential to make lots of money if Europe continues to burn to the ground or somehow manages to extinguish the fire.

John Nyaradi is the author of The ETF Investing Premium Newsletter.