U.S. investors certainly have plenty of domestic concerns to worry about at the moment. Inflation remains at 40-year highs and the Federal Reserve is still hiking up interest rates. Both the first and second quarter saw GDP contract, which used to be the classic definition of a recession.
Consumer sentiment remains right at historical lows as the average consumer has lost buying power for 15 straight months now, and personal savings rates are very low and continuing to fall. To top it off, job growth is strong now but seems unlikely to remain so as we head into fall.
As I said, a litany of U.S. centric issues. However, investors should not take their eyes off Europe as the continent seems in much worse shape than this country at the moment. Thursday, the Bank of England hiked its main interest rate half a point, the largest increase since 1996. The bank sees inflation peaking in October at 13% and projects the oncoming recession will last five quarters.
The U.K. as well as Europe is paying the price for both the big alternative energy push across the continent as well as ill-conceived and poorly planned sanctions on Russia. Not surprisingly, these measures are backfiring to a large measure and spiking energy prices. Britain's energy regulator allowed a 54% increase to the price cap to customers in April, and an even bigger price hike is on tap for October. This is expected to push average annual household energy bills in the country to nearly $4,500.
The largest economy on the continent, Germany is in trouble given its dependence on Russian energy. The country gets roughly one third its oil supplies, over half its coal and 40% of its natural gas from its neighbor, which has ratcheted down supply flows.
The continent itself is having a tough time filling its natural gas storage facilities in anticipation of winter. This situation is starting to be felt in a major way within Germany and Europe at large. German retail sales just had their biggest monthly plunge since 1994 as sales decreased 8.8% in real terms.
To top it off, low water levels on the Rhine, a major transportation network, are impeding barge traffic to a significant degree.
Meanwhile, in Italy the government has dissolved, and snap elections are scheduled for late next month. The likelihood of a coalition of Euro skeptical groups seems high. This could threaten Italy's access to EU fiscal support and the ECB's new anti-fragmentation tool, as well as future EU integration and joint debt issuance.
It is hard to see how Europe can avoid a long recession at this point. And if thing plays out the wrong way in Italy, a scenario where a much larger 'Greek Debt Crisis' comes to fruition can't be discounted. Either would cause significant volatility for the markets and one reason I continue to keep a sharp eye on Europe even if others are too complacent on this threat in my view.