Hopes of economic recovery in Europe received another jolt last
week. The Eurozone, the 18 nation bloc that comprises some of the
behemoths, saw its second quarter GDP growth stagnating. This comes
along with a 0.2% contraction in Germany's economy and Italy
sliding to recession. The dismal data comes at a time when Europe's
banking sector concerns have intensified following the crisis
surrounding Portugal's banking giant Banco Espírito Santo.
The zone's manufacturing activity has also been choppy. Ahead of
the GDP data, the European Union's (EU) statistics agency had
reported the second consecutive month of decline in industrial
production in the 18-nation bloc. Evidently, the economic recovery
is fast losing momentum. In any case, it is debatable whether a
recovery began at all.
Euro Area Sees Zero Growth; Germany Contracts, Italy
Slips into Recession
According to the European Union's Statistics Office, economic
growth in the euro area stalled in the second quarter. The zero
growth reported by Eurostat was in contrary to expectations of a
0.1% increase. GDP had increased 0.2% in the Eurozone in the first
quarter. Eurozone's $13 trillion economy contributes 17% of the
global gross domestic product.
The powerhouse Germany saw a surprise dip in its GDP - the first
one in over 12 months. Germany's Federal Statistics Office reported
a 0.2% contraction in second quarter. The economic contraction
between April and June compared unfavorably to expectations of zero
growth. The Statistics Office also revised down first quarter
numbers to 0.7% from 0.8%. Nonetheless, the second quarter
contraction is a lot to worry about when juxtaposed against first
quarter numbers. It was also reported separately that Germany's
inflation dropped to the lowest since Feb 2010, at 0.8%.
The surprising Germany contraction was largely an outcome of
high level of trade deficit. Declining investments, more so in the
construction sector, dragged the GDP to the red.
Eurozone's third-largest economy, Italy, slipped into recession
after its GDP shrank 0.2% in the second quarter. A Reuters poll had
been expecting a 0.2% gain. This was the third instance that Italy
slid into recession since 2008. Prime Minister Matteo Renzi now
faces severe pressure to implement the structural reforms.
"Growth Broken Down" in France
France, which along with Germany, contributes 66% of the bloc's
GDP saw zero growth in the second quarter. France's Finance
Minister Michel Sapin said "growth has broken down, in Europe and
in France." The country also cut its 2014 and 2015 growth forecasts
and said it will fail to meet the deficit targets this year.
National statistics office INSEE reported zero growth in the
second quarter, mirroring the flat growth also recorded in the
first quarter. This makes things difficult for the nation to
achieve a 1% growth. The French government halved its 2014 growth
projection of 1%. The 1.7% forecast for 2015 was also shunned.
As for trade deficit target, it is unlikely that France would
bring its deficit down to 3% by year end and as it had promised to
the EU. The sluggish growth and "insufficient inflation" will keep
France away from meeting public deficit target in spite of spending
control. Sapin said that France will cut its deficit "at an
appropriate pace," and revised France's public deficit up to over
4% of GDP this year.
France Blames ECB of Foot-Dragging
Meanwhile, Sapin has blamed the European Central Bank (ECB) for
France's failure to meet the deficit target. Speaking to Europe 1
radio, Sapin said: "We must adapt the pace of deficit reduction to
the exceptional situation... of growth that is too weak everywhere
in Europe and the exceptional situation of inflation that is too
weak across Europe."
Sapin has also urged ECB to be more active to offset deflation
threats and to boost growth. Sapin said that the region requires
monetary policy "adapted to the exceptional situation of weak
growth and weak inflation across the Eurozone."
Surviving "External Shocks"
Every quarter of dismal growth in the Eurozone exposes its
vulnerabilities. The region has been subjected to weak banking
system, disappointing manufacturing activity and dismal labor
force. In addition, the geopolitical concerns, considered as
"external shocks," make the situation murkier.
For instance, the Russia-Ukraine crisis is far from resolved.
The ensuing standoff with the greater part of the international
community has led to many sanctions. These sanctions affect not
just Russia's business, but they also hamper trade relations a
A recent example is Russia's food import ban in retaliation to
the widening of sanctions by the European Union and the U.S. New
sanctions restrict Russia's largest banks from raising finances in
the European Union and place a trade bar on arms. In response,
Russia has banned a wide range of food items, ranging from fruits
and vegetables to meat and poultry.
This ban will hurt European fruit and vegetables markets deeply;
Russia is the biggest importer of European fruits and vegetables.
However, the recent figures from Eurostat exclude the period of the
deteriorating ties between EU and Russia.
The slowdown in global trade and improved business for emerging
markets are add-ons to the plight of European exports.
Portugal's Banking Woes
Last month, Portugal's Espirito Santo International, which is
the biggest shareholder in Banco Espirito Santo (BES), halted
trading of its shares and bonds as the parent company Espirito
Santo International (ESI) allegedly defaulted on a debt payment. It
was also accused of accounting discrepancies.
Also, BES, one of the biggest banks in Portugal, had incurred a
loss of €3.58 billion in the first half of 2014 - the biggest loss
in Portuguese banking history. The central bank announced it will
split BES into a "good bank" and a "bad bank." The "good bank" will
receive a bailout of €4.9 billion from the bank resolution fund.
Out of this, €4.4 billion will be provided by the Portuguese
government as a loan and the rest as cash.
The "good bank" will be called Novo Banco. BES' potential assets
such as deposits and loans, which can be repaid, will accrue to the
"good bank." BES will become the "bad bank."
The "problem" assets of the bank will remain with BES.
Shareholders and the creditors will be liable for these assets and
may lose all of their investments. The Espírito Santo Financial
Group, which is one of the owners of BES, and Crédit Agricole (one
of the biggest French lenders) are among those which stand to
Meanwhile, The ECB has decided to create a unified watchdog for
all Eurozone banks before the end of the year. All 28 members of
the EU will also undergo stress tests to determine how they would
respond to another economic slowdown and a slump in the markets.
Stress Tests Ahead: 3 EU Banking Picks
3 European Stocks to Sell Now
Similar to wise buying decisions, exiting certain
underperformers at the right time helps maximize portfolio returns.
Selling off losers can be difficult, but if both the share price
and estimates are falling, it could be time to get rid of the
security before more losses hit your portfolio.
Here we will suggest 3 stocks that carry either Zacks Rank #4
(Sell) or Zacks Rank #5 (Strong Sell). These stocks also have
negative returns year to date and has been witnessing negative
earnings consensus estimate revision trends for the current quarter
Safe Bulkers, Inc.
) is an international provider of marine dry bulk transportation
services, transporting bulk cargoes, particularly grain, iron ore
and coal, along worldwide shipping routes for some of the world's
largest consumers of marine dry bulk transportation services. Based
in Greece, the company had a fleet of 30 dry bulk vessels as of Feb
Safe Bulkers currently carries a Zacks Rank #4 (Sell). The stock
has lost 13.3% year to date. Consensus estimate for current quarter
and year moved down by 53.8% and 29.8%, respectively, over the last
30 days. The current-year growth estimate is a negative 58.7%.
) offers pharmaceutical and other health-related consumer products.
GlaxoSmithKline has its R&D centers in the UK, U.S., Spain,
Belgium and China and is focusing on countries that offer
high-growth potential. Headquartered in the UK, the company
reported a 12% drop in second quarter 2014 earnings. The company
does not anticipate revenue growth in 2014.
GlaxoSmithKline currently carries a Zacks Rank #5 (Strong Sell).
The stock has lost 10.3% year to date. Consensus estimate for
current quarter and year moved down by 4.8% and 7.8%, respectively,
over the last 30 days. The current year growth estimate is a
Frank's International N.V.
) is a provider of engineered tubular services to the oil and gas
industry. It provides its services to exploration and production
companies in both offshore and onshore environments, with a focus
on complex and technically demanding wells. The company is
headquartered in the Netherlands.
Frank's International currently carries a Zacks Rank #4 (Sell).
The stock has lost 23.1% year to date. Consensus estimate for
current quarter and year moved down by 11.8% and 8.5%,
respectively, over the last 30 days. The current year growth
estimate is a negative 32.3%.
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