Spain is just the Beginning of Europe's Negative Impact on US Markets
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We went through the European struggle with Greece, Ireland, and Portugal and now we are hearing about Spain. At this point in time it is very important to keep abreast of what is happening over there. With Spain in severe turmoil and Great Britain struggling just ahead of Italy,U.S. businesses that have a large stake in selling in the European economy are being hit hard right now. This could have an impact upon our markets soon. It is just beginning again this year with Spain.
Spain’s unemployment rate is close to a blistering 25%. It spiked to 24.4% in the first quarter of this year after closing out 2011 at 22.9%. That’s an additional 365,000 individuals out of work for the highest unemployment rate in the 17 country Eurozone.
Standard & Poor's late Thursday became the first of the three leading credit rating agencies to strip Spain of an A rating. In a statement, S&P wrote; "Spain's budget trajectory will likely deteriorate against a background of economic contraction.” How can Spain’s economy do anything but contract? Companies like the S&P want Spain to show more fiscal support for the banks, but how can it do that when the country cannot even reach its own budget? There are going to be heightened risks for the government. We are by no means done as this is only the beginning.
Spain’s 10 year bonds—used as a measuring stick for the economic crisis, were at 5.93. Even though this is below the 7% level that is considered an unsustainable rate, it continues to show that investors are getting jumpy. It had pushed over the 6% level numerous times already and investors are worried about reliving another Ireland, Portugal, or Greece incident again.
But this time it would be worse. Spain is the fourth largest economy in Europe; this is what makes it even more significant. It is a lose-lose situation for the country. Prime Minister Mariano Rajoy has to convince investors he can control the economy and help unemployment. Yet gross domestic product contracted 0.4 percent in the first quarter, tipping the nation into its second recession since 2009. With the banks threatening to disrupt the Premier’s efforts and its budget shortfall projected to reach 6 percent this year and 5.7 percent in 2013, it is not likely to get better soon. Spain has to push through the deepest budget cuts in at least three decades while battling banks and investors.
This is something that will continue to have huge consequences for the U.S. companies that have ties to Europe. Besides Spain, even Great Britain was recently declared to be in a second recession. It is highly possible that companies will find revenue receding. This is not something new, but U.S. companies are just starting to feel the pangs.
Starbucks in Europe
Starbucks (NASDAQ: SBUX)global sales growth fell short of estimates, sending the company’s stock lower in after-market trading in spite of a 19% rise in profits and a lift in its full-year forecast. The reason? Weakness in European sales disappointed analysts. A 2.2% forecast ended up becoming a 1% drop. "The [European] macroeconomic environment is very, very difficulty and has taken a turn for the worse in the last couple months and that certainly impacts us,” said Troy Alstead, chief financial officer.
Kellog’s in Europe
Kellog’s (NYSE: K) is another example. Its first-quarter net income fell 2 percent, hurt by declining demand in Europe and higher raw material costs. Europe is Kellog’s largest international market and the macro-economic slow down there is hurting sales. It will continue to hurt the company’s bottom line.
This is not only true for Starbucks and Kellog’s but other companies that also have a big stake in European sales. If analyst revenue figures are not met in the next coming quarters because Europe’s economy ends up being worse that expected, companies will suffer and investors will react negatively as the market reverses direction.
With the economy shrinking and the population restless, there are concerns that the government will not meet its targets. Spain's economy is double the size of the three countries that have already been bailed out. So it will be very taxing upon the rest of the Eurozone countries. Italy could be next and it is the third largest economy in Europe. The European debt crisis is not something that is going to go away soon. There is a high probability that it will have a negative impact upon U.S. companies and their revenue streams in the not to distant future.
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