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August 20 2014

If you have young children or grandchildren, you may have read “Alexander and the Terrible, Horrible, No Good, Very Bad Day” by Judith Viorst. Well, that’s what last week was like on the European continent from an economic perspective.

Hopes of economic recovery were put on hold when gross domestic product (GDP) figures across the region showed no – nada, zero, zip – growth overall during the second quarter of 2014. First quarter’s growth (0.2 percent) hadn’t been all that impressive either, but at least it was headed in the right direction. The strongest second-quarter performers were Netherlands, Spain, and Portugal, according to The Economist. However, some of Europe’s largest economies (Italy, Germany, and France) contracted during the period.

Geopolitical unrest prompted the Euro area’s poor showing. Turmoil in the Middle East, violence in Ukraine, and sanctions against Russia have, among other things, led to a slowdown in demand for luxury goods that has negatively affected European economies. After delivering strong performance in 2013, the MSCI Europe Textiles, Apparel, & Luxury Goods Index was down more than 10 percent in the month of July and down 4.75 percent for the year. China’s anti-bribery and corruption campaign also has reduced demand for luxury goods, according to Bloomberg.

The Euro area’s economic growth (or recent lack thereof) has sparked fears of deflation in the region. The Economist offered this insight:

“Deflation would be particularly grave for the euro area because both private and public debt is so high in many of the 18 countries that share the single currency. Even if inflation is positive, but stays low, it hurts debtors as their incomes rise more slowly than they expected when they borrowed. If deflation were to set in, the effects would be worse still: when prices and wages fall, debts, which do not shrink, become harder to repay.”

Woes across the Atlantic put a shine on markets in the United States, according to Reuters. Major U.S. stock markets finished the week ahead and benchmark U.S. treasury yields finished the week at a 14-month low.

  • Data as of 8/15/141- WeekY-T-D1-Year3-Year5-Year10-Year
  • Standard & Poor’s 500 (Domestic Stocks)1.2%5.8%17.7%0.17514.8%6.1%
  • 10-year Treasury Note (Yield Only)2.5N/A2.82.33.54.3
  • Gold (per ounce) -1.1 7.9-2.5-9.36.812.4
  • DJ-UBS Commodity Index-1.30.0-3-7.40.1-1.5
  • DJ Equity All REIT TR Index1.618.620.314.920.49.6

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Bart A Zandbergen, CFP® is a Registered Investment Advisor with Optivest, Inc and a Registered Representative with Gramercy Securities, Inc. Investment advisory services are offered by Optivest, Inc. under SEC Registration and securities are offered through Gramercy Securities, Inc., member FINRA & SIPC, 3949 Old Post Road, Charlestown, RI, 02813, 800-333-7450.

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