Market Finally Wakes up to the Serious Problems in Europe

Forex forecasters are finally taking the rising threats of Spain and Italy seriously by saying that the euro is destined for a fall after debt crisis reignites. The head of currency strategy at Wells Fargo, Nick Bennenbroek, says that the euro is expected to drop 5% to $1.24 by year end. The kicker here is that Mr. Bennenbroek is at the top of the list in terms of accuracy while the second most accurate currency predictor, Westpac Banking, saying the euro will fall to $1.26 by year end.

As you can see, Wall Street is finally starting to take the crisis in Spain and Italy more seriously. A few weeks ago, I wrote an article warning of a “second Greece-like event” in Spain. Spain’s interest rates are up and currently at 5.91%, which is getting into the danger zone of 7%. Italian bonds are also on the rise in the last month.

Wall Street has been more and more concerned about the growing problem that is Spain and Italy. Both countries have not made as much drastic change as Greece which could be good or bad. Right now, it looks to be leaning towards bad because both countries have not made any notable progress with cutting total debt loads. This certainly will have a serious strain on the US and world markets and could possibly throw us into a correction.

On top of the worries in Europe, slowing payroll numbers and falling margins are the main sources of concern for the US. Many pundits believe that the rally is sustainable through this environment however, I disagree. Unless margins aren’t declining as bad as most traders expect, there will be a correction.

There is simply too much uncertainty and bad news out there for a rally to continue. Europe is on the verge of a double dip recession and the US may need more stimulus to help the recovery along. That being said, I think we will get a nice relief rally if Chairman Bernanke comes out and says that he will be stimulating the economy further, presumably with the third installment of quantitative easing.

The main point to pull away from this article is that the euro could continue to fall as much as 5% by the end of the year. This could be a great opportunity to short the euro if you are willing to accept the possible risks involved. As value investors, we also note that the consensus is usually wrong.

Another main point is to watch out for factors that could push us into a correction such as falling margins, payroll and the revival of the European debt crisis.

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