Overview of Europe — Good News?
The slow-moving train wreck that is Greece is moving along with new developments. The Greek banking system is experiencing a run, and accordingly the European Central Bank (ECB) is continuing to throw them a lifeline of emergency liquidity. Eurozone bankers are trying to keep the pressure on the Greeks to come to a negotiated settlement rather than having to resort to capital controls. Greece has supposedly made much more reasonable overtures to Europe, and a deal might be done in a few days to extend Greece’s payments until the September and October time frame. Greece may or may not stay in the Euro, but a short-term rally in Europe will follow the successful, if temporary, conclusion of a deal.
We are buying some European stocks that have fallen in the last few months to take advantage of lower prices.
In our view, capital controls are likely to be implemented in Greece in the fall if ECB supplemental bank financial support is removed. That would occur if Greece failed to make good on any compromise and resorted to defaulting on their income and principal payments to creditors.
Europe may rally, but other problems are lurking. We anticipate that the rise in Europe will continue, but it may be bumpy due to Russia. One the Eastern side of the continent, the Russians are continuing their propaganda, mis-representation, and attacks on Ukraine, and will soon add to that greater physical aggression against the small and relatively defenseless Baltic republics. Russia has already encroached upon and threatened these countries, and a disheartening recent poll in Europe says that over 50 percent of the European public do not think NATO should defend the Baltic states even though they are NATO members.
U.S. Defense Secretary Ash Carter Puts Heavy Weapons in Estonia: “We will stand up to Russia’s actions and their attempts to re-establish a Soviet-era sphere of influence.”
Is it possible that NATO will prove as toothless about defending the Baltic states as European and U.S. foreign policy has been about defending Ukraine?
These two major problems bedevil the outlook for Europe, even though QE is ongoing, with aggressive ECB buying of European bonds. We doubt that the power of QE will be able to overcome the negative psychological influence of Greece and Russia as long as they remain on the media front pages. As we all know, markets may sometimes be about fundamentals, but overriding that fundamental backdrop are the current news events and their immediate psychological impact on markets.