Friday, November 20, 2015

Terror in Europe and its Broad Impacts

Terror in Europe and its Broad Impacts

Mike Larson | Monday, November 16, 2015 at 4:18 pm

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Friday’s Paris attacks represent a major human tragedy and my sympathy and solidarity lies with the French people. But what do these events mean from an economic and geopolitical standpoint? Here are a few thoughts: 1) ISIS is the most dangerous global terrorist threat out there. They have taken up the torch from other groups like Al-Qaeda, and they are “going global” now rather than focusing squarely on establishing and holding territory in Iraq and Syria.

That means more attacks in Europe, Africa or the U.S. can’t be ruled out. At the same time, ISIS is now bringing the force of the world down on its head by attacking both U.S. allies and Russia, which has been a clear thorn in our side on other issues.
The civilized world unites over France.
That could ultimately hasten its demise by provoking much more aggressive military action. I don’t foresee us launching anything like the full-scale ground invasion in Iraq. But you can be certain even more fighter jets, drones, ships, special forces and intelligence operatives will be re-directed to the region — despite the past reluctance of the Obama administration and Congress to get too deeply embroiled in a ground fight in Iraq and Syria.
2) There will likely be a short-term impact on travel in France and other parts of Europe. But once the immediate hotel and flight cancellations work their way through the system, we should see a return to pre-attack economic conditions. That’s been the pattern in past attacks as far back as 9/11.
Unfortunately, that’s a problem — because Europe’s economy was already struggling. European GDP grew just 0.3% in the third quarter (missing forecasts) with exports particularly weak.
Governments will have to spend even more money on security and intelligence in the days, weeks and months ahead. And they’ll have to do so at a time when they’re already coping with the massive humanitarian and financial costs of the migrant crisis. We’re also likely to see far right and nationalist parties gain ground in Europe. That could erode the Schengen Agreement, which allow for the free movement of people between countries in Europe.
3) Historically, any increase in instability or terrorism in the Middle East has led to speculation in the oil market, given the significant amount of global production in the region. But nothing ISIS has done to date … or any of the counterattacks we or our allies have launched … has jeopardized oil supply. The world is awash in oil right now anyway so I don’t expect to see oil prices spike in the wake of the latest attack.
As for the stock market, futures originally dropped sharply in the wake of the attack. But they recovered overnight, and the Dow ultimately staged a 237-point oversold bounce as the day wore on. The problem is that we’re still mired in an uncertain, unsteady environment.
Specifically, market internals stunk during the recent rally, and credit and commodity markets haven’t been confirming any equity strength that does exist.
“Governments will have to spend even more money on security and intelligence.”
The major averages started to wake up to that fact last week, with the Dow Industrials dropping more than 700 points from their recent peak and the S&P 500 falling back toward 2,020. We’re closing in on some key technical support levels and if they give way, the bulls’ “year-end rally” thesis is going to be on very thin ice.
Now I’d like to give you a chance to weigh in on the attacks in France. What do they say about ISIS’ capabilities, or the world’s strategy for dealing with the terrorist group? What will this mean for U.S. involvement in the Middle East, or the migrant influx in Europe? Will there be lasting market and economic impacts, and if so, what kind? Use the Money and Markets website as your outlet in these difficult times.
Our Readers Speak
Meanwhile, I wanted to cover some of the comments you had about the troubling retail news from Friday. Reader Robert P. said the following over at the website:
“What’s going on with retail? The answer is simple: For many Americans 1) ‘No inflation’ is at least as big of a joke as this ‘economic recovery’ we’ve been having … 2) What lower gas prices giveth, Obamacare taketh away … and 3) The ‘smart money’ has figured out where we’re headed and has drastically curtailed spending.”
Reader B. Simpson added: “I am personally the owner of a retail sales company and the sales for the last 10 months have been declining, declining, declining. Along with this, profit margins are declining due to competition from the online retailers. Also, I am seeing more and more declines on credit cards — which tells me that the buyer is maxed out and deep in debt.”
Reader Steven also chimed in by saying: “The sad fact is that discretionary income is sorely lacking due to reduced salaries and employment levels. Yes, wages do need to be increased but more importantly, the wealth needs to be spread around instead of being concentrated into a single demographic. The way things are, we are only choking off what hope of economic recovery we may have.”
On the other hand, at least one commentator suggested the market outlook may not be as gloomy as it seems at first glance. Reader $1,000 Gold said:
“The fundamentals can be bad, yet the market can go up knowing that low oil prices and interest rates will be the fuel for the next expansion. This correction is coming to an end. Those who buy into this scary pullback may very well look back upon this correction as the last good buying opportunity before the bull resumed.”
Thanks for the observations. For what it’s worth, I believe the lousy economic news we’re getting both domestically and abroad is a troublesome sign for the markets. If sales during the holiday shopping season disappoint — at a time when inventories are already swelling to multi-year highs — it’s going to lead to a sharp slowdown in the economy in 2016 as orders dry up and businesses cut back on production.
Do you have any other thoughts out there? Let me hear about it online when you get a chance.
Other Developments of the Day
BulletThe investigation into Friday’s attacks in Paris is unfolding rapidly, and the French government is aggressively responding in any way it can. France launched a round of airstrikes on ISIS positions in Syria over the weekend. More recently, French and Belgian police have carried out scores of raids and detentions as part of their investigation of the attacks. They targeted locations in and around the French cities of Lille, Lyon, Grenoble, Marseille and Toulouse, as well as Paris.
BulletIt’s mega-merger time in the hotel industry, with Marriott International (MAR) announcing plans to buy Starwood Hotels & Resorts Worldwide (HOT) for $12.2 billion. The cash and stock deal would create a hospitality behemoth with 5,500 hotels and 1.1 million rooms around the globe.
BulletThe global economic slowdown came to Japan’s doorstep in the third quarter, with GDP there shrinking by 0.8%. The decline followed a 0.7% contraction in the second quarter, confirming Japan has “officially” slipped back into recession.
BulletSpeaking of a global slowdown, the data coming out of U.S. ports is far from encouraging. The Wall Street Journal analyzed import data for the ports of Los Angeles and Long Beach, California, and the New York metropolitan area.
Turns out imports fell 10% in the past couple of months at a time when we typically see a seasonal surge. That’s a key reason why the Dow Jones Transportation Average has been dramatically underperforming, and it could signal that Corporate America is worried about the outlook for growth.
What do you think of the latest mega deal in the hotel business? What about Japan’s inability to get its economy going? And why do you think businesses are bringing fewer goods into our country than they typically do this time of year? Share your thoughts below.
Until next time,
Mike Larson
Mike Larson Mike Larson gra

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