Is The Worst Really Over For Europe? (VGK)

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July 21, 2017 6:19am NYSE:VGK

NYSE:VGK | News, Ratings, and Charts

From David Dutkewych: If you read the current headlines, you would certainly think all is well in the European Union.

The major stock markets of Europe are trading near their highs. And the economic data has been improving.

So is the worst of the economic crisis over in Europe?

Not by a long shot!

I know … things look better in Europe on the surface.

The elections have passed, causing little volatility in the markets. And,the euro has responded by trading near 1.16 vs. the dollar, or about 10% higher against the greenback, for this year.

But in reality, nothing has changed for the better in Europe. In fact, things are getting worse.

Here’s what I mean …

Greece is poised to borrow money from investors for the first time since 2014. You read that right — Greece wants to take on more debt.

Observers expected the cash-strapped country to sell a five-year bond this week or the next. And this is all following another bailout.

In fact, Greece successfully received a 7.7-billion-euro tranche of rescue cash from its creditors earlier this month. That confirms it will avoid defaulting on its lenders this month.

And it’s not just Greece …

The looming sovereign-debt crisis in Europe is real. It will come sooner than most investors want to believe, and catch many of them off-guard.

Here are some potential triggers:

The first is a potential reduction in the monthly 60 billion euros’ worth of securities the European Central Bank currently buys. The ECB’s balance sheet now stands at 4.23 trillion euros, making it the largest central-bank holding in the world.

The ECB is on track to unwind its stimulus next year. But my guess it’s likely to drag out the process. The rollback is set to start in January and take nine months. That’s up from the previously predicted seven months, and with future reductions announced one step at a time.

The second potential problem is Italy. The general election is due before next May. Look out if the Eurosceptic party called The Five Star Movement wins. Then we are likely to see panicked bond-selling.

And let’s not forget about the German election this fall. It could make waves if Angela Merkel loses ground heading into the September vote.

The third potential problem is immigration. Civil unrest is ramping up all over Europe. And one of the main drivers is the migration crisis. It’s putting countries at odds, and could be a potential tipping point that ultimately breaks up the union.

Then there are the ongoing Brexit negotiations. So far, this divorce is not going as smoothly as the two sides hoped for. I expect these negotiations to continue to challenge the two sides. And the result could have disastrous consequences for the EU.

The bottom line: Europe is still drowning in debt. The negative interest rates of Mario Draghi and the ECB have totally failed.

So here is my recommendation: Steer clear of any European sovereign debt of a maturity greater than one-year. Preferably, stick to high-grade corporate debt or you can go with 90-day Treasury bills or Treasury-based money markets.

The Vanguard FTSE Europe ETF (NYSE:VGK) was unchanged in premarket trading Friday. Year-to-date, VGK has gained 20.54%, versus a 11.57% rise in the benchmark S&P 500 index during the same period.

VGK currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #2 of 89 ETFs in the European Equities ETFs category.

This article is brought to you courtesy of Money And Markets.

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