The slowing pace of growth for Eurozone economies raised concern among investors and politicians in those countries Thursday. Added worries came from the exchange of sanctions between European nations and Russia.
Thursday, August 14, 2014
Eurostat, the European Union's statistical department, released figures showing that while GDP did increase in 2014's second quarter, it rose by only 0.2% across the entire EU28 region and "remained stable" in the core EA14 euro currency region. The Czech Republic saw the largest rise in Q2 2014, climbing 1.5%, while Cyprus saw the largest losses at -0.7%. Inflation also decreased, sliding to a 0.4% annual rate, the lowest since October 2009.
However, the flat economic news actually helped buoy European stock indices like the German DAX or the British FTSE, Bloomberg reported, with the latter rising 0.5% and the former gaining 0.3%.
Why would weak economic figures actually buoy stock sentiments? As usual, the answer comes down to central bank policy, which has been one of the key determinants for economic and market trends since the Great Recession.
"There's a perception that the low-growth environment might push the European Central Bank into some form of further action," CMC Markets PLC chief market analyst Michael Hewson told Bloomberg. "Whether that perception is right is unclear, but the market believes further stimulus is on the way. That's giving a positive bias to equity markets in Europe."
Low interest rates and economic stimulus both depress bond yields and drive a lot of cash into the investment sector of the economy. Seeking returns, major banks and traders push that cash into higher-return assets like stocks, commodities and foreign investments.
Bearish fears remain
On the negative side, many remain concerned that exchanging sanctions or starting a trade war with Russia, one of Europe's key energy suppliers, will impact the entire region.
On Thursday, the German Chamber of Commerce (DIHK) slashed estimates of export growth this year from 4% to 3.5%, Reuters reports. DIHK foreign trade head Volker Treier commented that "we're on a dangerous path."
About 10% of German export firms ship to Russia, but they might also find themselves under pressure as other partner economies slow in response to the crisis. In Finland, for instance, nearly half of all firms anticipate declining revenue as a direct or indirect result of the sanctions program.
Hedging against euro risk
Collectively, the eurozone represents the world's largest economy - its importance to the global financial structure can only be rivaled by the US itself. Many, if not most, investors will see their fortunes at least indirectly tied to the movements of European markets, whether through foreign exchange fluctuations, direct investment or even commodity and manufacturing demand.
Investors may use binary options like those offered by Nadex to protect portions of their portfolio against systemic risk. These options offer a fixed maximum downside loss, and Commodity Futures Trading Commission regulation means they’re a more transparent investment than unregulated products trading with offshore binary providers.
By buying binary options that pay out when European stock indices like the FTSE 100 or DAX 30 rise above a certain level, investors might gain from rising sentiment. Conversely, if they anticipate more issues and economic losses as a result of the crisis, they may sell options that are in the money when the indices fall below a given level.
A mix of both may even serve as a useful hedging strategy, combined with a strategy that takes advantage of changing forex conditions.
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