Over the past three weeks, the market has been giving up a good chunk of the rebound stocks have had off their mid-June lows. The Nasdaq has had six losing trading sessions in a row, dropping some 8% in the process. Both the S&P and Dow have been down five of the last six trading days.
It is hardly surprising that investors are doing some profit taking after a decent rally. The market is beset by a litany of worries right now. Inflation and rising interest rates get the lion's share of headlines around market concerns from the financial media.
However, there are two worries that have not been getting enough attention in my opinion. The first is the fast-declining status of the American consumer. The other is the precarious situation in Europe. We will circle back on the consumer sometime over the next week. In today's column we will focus on the problems in the EU as those issues are finally starting to draw the concern they deserve.
These issues are rippling across the pond and will continue to do so. Investors saw a nice rally in the markets Friday broken up by news that Gazprom has discovered a 'leak' during its three-day maintenance window and gas flows would not be turned back on as scheduled to Europe. Over the past few years, we have seen our share of historical errors by governments across the Western world. The Covid lock downs being at the top of that list. We continue to pay a steep price for those erroneous choices by our elected leaders.
But when it comes to ill-thought out, ill-planned and poorly implemented policies in this century, the decision by Europe to sanction a critical source of a huge portion of their energy supplies in response to the invasion of Ukraine, has to get at least a bronze medal. European citizens, businesses and the economy are now bearing the burden for this folly. Given skyrocketing energy costs and winter fast approaching, it is hard to see how Europe avoids a long and deep economic contraction. I also would not be shocked if there weren't mass protests across the continent if energy prices stay at these levels, let alone rise from here, which seems likely.
According to a recent survey by the Association of German Chambers of Industry and Commerce, one out of every six industrial companies in the country feels forced to reduce production due to high energy prices. The largest steel maker in Europe, ArcelorMittal (MT) just announced that two plants in Germany would be partially closed at the end of September. A plant in Spain, will also be idled. A good portion of aluminum smelting capacity across the continent has also already been idled because of soaring energy costs.
These developments which likely will escalate, have notable ramifications for our economy and market. The dollar remains stronger than it normally would given our tepid economy as the country looks like the best house in a bad neighborhood right now. The Euro is currently trading below parity to the greenback for the first time in over two decades.
Obviously further manufacturing shutdowns or capacity cuts in Europe will do nothing to help the global supply chain issues the economy has been dogged with for more than a year now. Although this might be a tail wind to American manufacturers like United States Steel (X) who have access to much lower energy costs and could get some benefit from the problems of its European brethren.
There is a high probability that problems in Europe will get worse as colder weather hits the continent. This means a greater chance than our markets will experience more volatility, as they did Friday, due to events across the pond.
