Europe is no stranger to crisis. It wasn’t that long ago when Greece was at the center of a financial crisis. The country struggled under a heavy debt load and investors were uncertain that Greece could recover. The European Central Bank (ECB) joined with other government agencies and ensured Greece survived.
Survival does not mean that Greece’s economy is thriving. It is not. But, Greece is not alone. There are other European countries struggling. Since the crisis that was centered on Greece, analysts have described the most troubled European economies as the PIGS.
The PIGS include Portugal, Italy, Greece and Spain. They share high debt loads, slow economic growth and high unemployment. In recent weeks, the problems in Italy surged to the forefront.
Italy’s Election Sparks a Market Panic
After its latest election, two parties in Italy attempted to form a coalition that would provide the country more financial freedom, either within the euro or, if needs be, outside it. According to The Independent, “This is because they need to be able to print huge sums of money on an irresponsible program, popular or not.
The scale of the public spending required to satisfy their populist promises amounts to around 10% of Italian GDP, a figure usually reached only during an extreme economic crisis. They can do that only by a vast increase in borrowing and taking grave risks with the viability of the euro and Italy’s membership of the system.
There is even loose talk about Italy resorting to a second, parallel euro banknote issue, aside from the official European Central Bank notes, via new “mini bots”, mini treasury bonds (the bot standing for buono ordinario del tesoro) with denominations from €10 to €250,000, a boon to criminals and tax dodgers as well as this new breed of Italian politicians.”
The conclusion of many analysts was that all of this amounted to an attempt to get around the strict rules of the single European currency.
Italian bonds sold off and interest rates soared. The chart below shows the relative stability of the past year and the extreme volatility of recent weeks.
There’s More than an Economic Crisis
Europe has been struggling to address a wave of refugees in the past several years and Italy is pushing that issue back to the center of the world stage.
Recently, the country’s new interior minister, Matteo Salvini, blocked a ship with refugees from entering Italian ports, prompting an international outcry. The rescue vessel, which is carrying 629 migrants, was also refused by Malta and headed to Spain escorted by two Italian ships.
Experts noted, “the case has reopened one of the main unresolved fault lines in European politics: how to share responsibility for migrants trying to enter the bloc from conflict zones and poor countries, mainly across Africa and the Middle East.
More than 1.8 million people have entered Europe irregularly since 2014 and Italy is currently sheltering 170,000 asylum seekers. Salvini’s League scored its best election result in March elections after pledging to deport an estimated 500,000 unregistered migrants.”
And, all this comes as the European Central Bank is closing a chapter on one controversial policy, government bond purchases, while extending the life of another: negative interest rates.
The central bank Thursday laid out plans to wind down its giant bond-buying program by the end of this year, but said it likely would wait “at least through the summer of 2019” before raising its deposit rate, now at minus 0.4%.
The ECB’s decision to start phasing out some of its easy-money policies—a day after the U.S. Federal Reserve raised its benchmark interest rate and signaled two more increases this year—comes despite mounting evidence that the eurozone economy is slowing, amid threats ranging from international trade conflicts to political turbulence in Italy.
Trading the News From Europe
It seems likely that no matter what happens elsewhere, the forces within Europe are bearish. It is possible the European stock markets could fall even as the stock market in the U. S. and other countries rally.
This makes a trade that benefits from a decline in Europe potentially attractive. There is an exchange traded fund, or ETF, that rises in value as stock prices on European exchanges fall, ProShares UltraShort FTSE Europe (NYSE: EPV).
This is a high risk investment that seeks daily investment results, before fees and expenses, that correspond to two times the inverse (-2x) of the daily performance of the FTSE Developed Europe All Cap Index.
The fund invests in derivatives that ProShare Advisors believes, in combination, should have similar daily return characteristics as two times the inverse (-2x) of the daily return of the index.
The index is a free float-adjusted market cap weighted index representing the performance of large, mid and small cap companies in Developed European markets, including the UK. The fund is non-diversified.
EPV has been in a persistent down trend since it began trading with occasional sharp bursts of bullish price action.
Traders could consider buying a small position or using call options on the ETF. A call option provides the right but not the obligation to buy shares at a specified price for a predefined amount of time. Risks of buying put options is limited to the amount paid for the option.
If EPV rises, the call options could deliver triple digit gains with risk limited at all times. However, timing the trade properly could increase the probability of gains. The TradingTips.com service, PPK System, is designed to exploit patterns associated with market clues by looking for value and momentum in stocks.
This combination of value and momentum has been shown by many researchers to be the cornerstone of strategies that beat the market in the long run. The PPK System follows strict rules for buying and selling. You can learn more about this trading service by clicking here.