Europe Is in Bad Shape; the Next Financial Crisis Could Begin There
You must pay very close attention to what’s happening in Europe. It could be the source of the next financial crisis.
American investors usually don’t really pay much attention to what’s happening in Europe. The general consensus is that problems in Europe don’t mean much in North America. This is just wrong thinking.
Understand that the United States isn’t an economic island, isolated from everything. It’s very interconnected with the global economy. A problem in Europe becomes a problem for the U.S. very quickly.
Now, back to the topic: how could Europe become the source of the next financial crisis?
At the moment, there are several risks that could hurt the European financial system. For example, there’s the risk associated with Brexit. We still don’t know how Britain will exit the European Union (EU), and what will happen after that.
Since there’s a lot of uncertainty around Brexit, Britain’s economy has been taking a wild turn. Just recently, we found that construction output in Britain has plummeted to a decade low. It’s at the same level that it was when the global economy was going through the last financial crisis. (Source: “Construction output drops at sharpest rate since financial crisis,” Yahoo! Finance, July 2, 2019.)
That isn’t all.
Retail sales in the British economy have been declining at an alarming pace, there’s noise of the Bank of England cutting interest rates sooner rather than later, and the British pound remains weak and volatile.
Could banks in Britain face problems in the midst of all this? It’s possible, and we could face headwinds around the globe.
Eurozone Facing Extreme Headwinds, ECB Looks Nervous
Beyond the U.K., look at the eurozone. The common currency region is struggling, to say the very least.
There’s a widespread economic slowdown in the region. Look at Germany, for example, the biggest powerhouse in the region. The economic data out of that country looks bad.
The European Central Bank (ECB) seems nervous. The policymakers at the central bank are ready to cut interest rates and print more money if needed. Keep in mind, the ECB’s benchmark interest rate is already below zero.
As this is happening, banks in the eurozone never really recovered from the previous financial crisis. Their stock prices are speaking louder than anything.
Look at the chart below of BNP Paribas SA (EPA:BNP, OTCMKTS:BNPQY), a major bank in France.
Chart Courtesy of StockCharts.com
In early 2018, BNP Paribas stock traded around $42.00. Now it trades below $24.00. This represents a decline of 43% in little over one-and-a-half years.
Don’t for a second think it’s only BNP Paribas stock suffering. Across the eurozone, many bank stocks look like this.
Could something happen to other banks in the eurozone in the midst of all this?
Don’t Ignore Europe
Dear reader, I am paying very close attention to Europe. The mainstream media may not tell you much about it, but there are risks that could cause a financial crisis.
Just think about it: if a major bank in Europe collapses, won’t it have an impact on the U.S. financial system?
You also have to keep in mind, over the past few years, we have seen a massive rise in derivatives throughout the world. A bank failure in Europe simply would increase the counterparty risk and we could have a snowball effect from there.