Market Commentary: Time to sell European Equities?

Over the weekend we learned of worrying news out of Spain, as anti-austerity parties gained significantly in regional elections, worrying investors that the country could turn into a Greek drama. The only difference this time is that Spain is larger, much larger. To give you an idea of the difference between the two, and why there is significant cause for concern at this point, Spain’s economic size measured by gross domestic product (GDP) is almost six times larger than Greece. Hence, the potential impact of upheaval on the continent is much greater should we see the rise to power of anti-EU parties which will threaten the existence of the union and sow a large degree of uncertainty. Should the probability of this event keep rising I would be fearful of any European equity positions as these are bound to take a beating.

The greatest problem in my opinion is that policy makers cannot really afford to take any hits to the economy when they are currently firing on all cylinders. What would they do should Spain threaten to leave the currency bloc or the union itself? My guess is that recession will be back on the table should this event materialise and policy makers have very few bullets left in their magazine.

The Greek government is priming investors for another cliffhanger on June 5. While Greek Prime Minister Alexis Tsipras’s spokesman Gabriel Sakellaridis insisted on Monday that the government will pay salaries and pensions due at the end of this month, he refused to be drawn in on whether the administration will be able to find the roughly 300 million euros it’s due to pay the International Monetary Fund at the end of next week.

Greece looks set to miss the May 31 deadline German Chancellor Angela Merkel and French President Francois Hollande set last week for reaching an agreement on aid, with no more meetings of euro-area finance ministers scheduled before then and its creditors still to sign off on Tsipras’s economic plans. Therefore serious talks of default are back on the table as it seems Greece doesn’t have the money and won’t pay what it owes the IMF next month.

Where does this leave us? In the short term I expect some backlash from the increased equity risk premium associated with the sovereign problems in the euro area, therefore I would be looking to take some profits at this point and downsizing the overweight position. The market is already reacting to this, although many exchanges were closed yesterday, with the FTSE MIB and ASE falling 2.09% and 3.11%.

By way of a reminder, we’ve got a significant amount of data releases from the US this afternoon with durable goods orders, capital goods orders, FHFA house price index, S&P/Case Shiller house price index, May flash composite and services PMI’s, new home sales, consumer confidence, Richmond Fed manufacturing index and the Dallas Fed manufacturing activity index.

 

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