Dear Reader,

Vedran Vuk here, filling in for David Galland. Today, I’ll discuss the scenario of a European recovery. Would one mean that we’re finally out of the woods? I have a couple of other interesting pieces along with the Friday Funnies, so let’s get started.


What If Europe Does Recover?

By Vedran Vuk, Senior Analyst

Let’s play along with the economic scenario many market participants are predicting: a calmer Europe. If the continent does recover, is it time to put on the party hats and celebrate? Well, not quite. Sure, the pressure on equities would ease up, causing a brief rise in the market. But what then? Are we really out of the woods?

If Europe escapes this mess without a major crisis, those countries won’t come back at a screaming pace. Instead, the path to economic recovery will still be a slow crawl. Furthermore, China continues to have problems of its own. What started as talk of a Chinese slowdown is turning into real numbers. Sure, China isn’t doing horribly, but it’s hardly the hot market of a few years ago. The promise of never-ending growth with minimal risk just isn’t materializing. There are also other major players with mixed performances. With commodity prices cooling a bit, Brazil’s GDP growth is projected at 3.2% in 2012, a slight improvement from last year’s 2.7% growth. However, only a few years ago, predicting double-digit growth rates would have drawn no laughter, based on Brazil’s impressive 7.5% growth rate in 2010.

And then there’s the US story. The job market is improving at a snail’s pace… much like the rest of the world. If the euro crisis ends, it won’t mean a burst of growth for the US – but it could mean some additional headwinds. US Treasuries will no longer be shielded by buyers protecting themselves from the worst-case scenario. As soon as the coast is clear, Treasury investors will leave in droves, either flooding back into equity markets or higher-yielding euro countries.

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