European region purchasing managers’ index drops, fueling recession fears in Euro Zone

Just when Europe appeared to be settling down with a settlement of the Greek default, a purchasing managers’ index for the region indicates that a new recession is underway in what is the world’s largest economy when all the Euro Zone’s members are combined.

The index for the 17 nation region declined again in March to a three month low of 48 which is down from 49 in the previous month.

Analysts had been expecting a reading of close to 50 and so today’s report is a sizable miss from expectations.  Readings below 50 are thought to indicate contraction in the economy versus growth for readings of 50 or higher.

The recession forecasts for Europe have been intensifying since fourth quarter and today’s report of acceleration in the decline adds to the region’s woes.

After disaster in Greece was avoided, European leaders are hoping to return their focus to growth and this report accentuates the importance of getting renewed growth going in the area.  The European Central Bank has changed its outlook on Europe from modest growth to modest recession, a decline of 0.1% in GDP compared to the previously estimated 0.2% growth.  Of course all estimates are a fast moving target as the region wrestles with austerity programs and ongoing high unemployment in Greece and Spain, among other members.

On the upside for the zone, German investor sentiment is rising and bond yields in troubled Spain and Portugal have remained under control at acceptable levels.

ETFs that will likely respond to the news are Vanguard MSCI Europe Index (NYSEARCA:VGK) and iShares MSCI Germany Index (NYSEARCA:EWG)  In Thursday trading in Europe, major indexes are down sharply with the DAX down 1.50% and the Stoxx 50 losing 1.60%. A leading European ETF, iShares Europe 350 (NYSEARCA:IEV) lost 0.6% on Wednesday.

The Euro Dollar (NYSEARCA:FXE) is also feeling heat from the news, declining 0.4% to $131.64.  Oil, gold and most commodities are also in early morning declines along with the U.S. futures’ indexes.

We can also expect to see possibly significant moves in Italy as represented by iShares MSCI Spain Index (NYSSEARcA:EWI) as the country’s bonds continue to drop over fear of the country’s potential journey to insolvency and default.

Bottom line: The problems in Europe have not gone away and threaten to derail the fragile global economic recovery.  Opportunities could exist in put options on European ETFs, “inverse” European ETFs, long U.S. Dollar or “short” Euro dollar positions.

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About John Nyaradi (http://www.wallstreetsectorselector.com) John Nyaradi is Publisher of Wall Street Sector Selector: Your Home For ETF Investing! John writes a weekly guest column, John Nyaradi’s ETF Edge for MarketWatch.com and his investment articles have appeared in many online publications including Trading Markets, Money Show, Yahoo Finance, Investors Insight, Fidelity, ETF Daily News, iStock Analyst , among many others. His book, Super Sectors: How to Outsmart the Market Using Sector Rotation and ETFs, is published by John Wiley and Sons and included among the Years Top Investment Books in the 2011 Stock Trader’s Almanac.