Eurozone Crisis & Recession
Other than a lot of promises and hand shaking, very little progress had been made in resolving the issues that plague the Eurozone.
The bond buying program that has been put forth by the ECB is really nothing more than a regurgitation of the SMP Program which failed in 2011.
The reality is that the program doesn’t attack the root problems at the base of the crisis, which is a complete lack of a constitutional union and central banking system.
The recession in the Eurozone is just as big of a risk to the 4th quarter as a return of the crisis.
The continued recessionary drag is dampening revenues and slowing demand for exports from the US Recent corporate reports from key transportation related companies have all warned of weaker outlooks due to slowdowns in the Eurozone.
Exports are expected to drop with slowing global growth – the recent drop in durable goods orders and industrial production are warnings that this could already be occurring.
It is unlikely that the domestic economy will be able to avoid the drag of a continued recession in Europe for long.
The Fiscal Cliff
The fiscal cliff is looming larger as we rapidly approach the end of the year.
The simultaneous collision of expiring tax cuts, automated budget and job cuts, and the implementation of 22 new taxes in the US will weigh not only the economy but the markets as well.
If the Congress does not address this issue, the fear of a jump in tax rates will increase selling as investors try to book capital gains at 2012 rates of 15% before they jump to 23.8% in 2013.
The impact of the entire fiscal cliff (should it go unchecked) can impose an estimated 4% clip to economic growth, pushing the US into a deep recession next year.
The financial markets are currently pricing in strong economic growth in 2013, as high as 4%, versus the current paltry 1.25% as of Q2-2012.
With such a wide disparity between the current price of the S&P 500 index and the underlying economic and fundamental realities, the potential reversion could be as brutal as seen during the last two recessionary cycles in 2000 and 2008.
Another risk to the 4th quarter comes down to the impact of the deteriorating economic environment on corporate earnings.
Stock prices have been rising solidly over the past several months to get in front of the anticipated QE3 operation by the Fed.
However, that rise in price comes at a time without an increase in the underlying fundamentals.
This detachment of price from earnings puts the markets at risk of revision in the months ahead.
Gross, EBIT (earnings before interest and taxes) and Net Profit Margins are weakening.
Falling margins and year-over-year revenue growth (top-line sales) becomes a real concern.
Unlike the 2008 recession when revenues fell at the same time as the cost of sales, we are currently witnessing a far more disturbing development of falling gross margins in recent quarters.
This suggests, unlike the last recession, that costs are rising relative to top-line growth, which will rapidly impact profit margins more than currently estimated.
These 3 points must be taken into account when trading binary options!
Markets now a days are always sort of “unstable” due to speculation mainly around the Eurozone!
Until next time, good luck on your forex tradings 🙂