If you believe in that kind of stuff, Friday 13th turned out to be unlucky for the Eurozone economies.

In truth, the rot had set in long before today.

The region’s official economic reporting agency, Eurostat, said this morning that the 15 Eurozone nations (although it’s now 16 countries, with Slovakia officially joining on January 1 this year) combined to post a 1.5% fourth quarter decline – the worst performance since Eurozone GDP reporting began in 1995.

Compared with the fourth quarter of 2007, the Eurozone GDP fell by 1.2% – the first contraction over a 12-month period in the region’s history.

I don’t know how you say “ouch” in all of the appropriate bunch of different European languages, but suffice it to say that’s the overriding sentiment.

The Eurozone’s Big Two Take It On The Chin

The region’s two leading economies – Germany and France – largely led by dubious example, with Germany posting a 2.1% fourth quarter loss, compared with the third quarter, and France’s economy shrinking by 1.2%. It was Germany’s third straight quarterly downturn and the worst performance since 1990.

Further south, Italy slid in between its two northerly neighbors and recorded a 1.8% decline – its worst showing since 1980.

As foreign demand has sunk, so too has industrial production, with many companies working to fulfill existing order backlogs, rather than fresh orders. And with economists being quoted as saying things like “very serious recession” and “can hardly get any worse,” the pressure is mounting on the European Central Bank to cut interest rates from the current 2% level on March 5.

Certainly, the prognosis for the next few quarters is not good. The International Monetary Fund has already said that the Eurozone economy will contract by 2% this year.

Come On… Cut With Us

With the Federal Reserve’s interest rate at practically zero and the Bank of England’s base rate in the basement at 1% (the bank announced this week that it will begin buying commercial paper to complement its rate-cutting measures in a bid to stimulate the tumbling economy), new U.S. Treasury Secretary Timothy Geithner has said he will encourage his counterparts to take “bold measures” (quoted in Bloomberg) to bail us out of this mess.

But his rallying cry might not be necessary, as several members of the ECB’s monetary policy board, including President Jean-Claude Trichet have already strongly hinted that they will cut rates in three weeks.

Anyone want to buy some gold as a hedge?

Don’t say we didn’t warn you because we did; in our November issue written by our very own, Karim Rahemtulla.

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Oil Market Falls Further

With global demand nose-diving for just about everything, it’s no surprise to see the International Energy Agency say that demand for oil will plunge by 980,000 barrels per day to 84.7 million this year. That’s almost twice the amount it forecast just last month – a telling sign that 2009 is trudging down the same dark path as 2008.

With oil demand set to average 1.4 million barrels per day less this year than in 2007, I wouldn’t mind betting that we’ll see that number fall further, as the fallout from this crisis continues.

When America, Europe, and Asia are all taking a bath and the International Monetary Fund projecting a measly 0.5% GDP growth rate for 2009, you wouldn’t exactly expect the oil to be gushing.

Wanna Do The Contango?

No wonder all those oil tankers are sitting in offshore waters, bloated with 80 million barrels of oil that nobody wants right now.

This is because the present oil price is less than longer-dated futures contract prices, so energy traders are busy hoarding it for the future. After all, if you can buy oil cheaper now, even if you don’t necessarily need to use it right now, why wouldn’t you? You’ll use it or sell it eventually, but this way just makes smart business sense. It’s similar to the way some savvy airlines hedged the cost of the oil they were buying before the prices shot up.

So these oil players aren’t actually taking delivery of the oil at the moment, because they’re making a profit on both the transaction and also benefiting because it’s cheaper to store the oil on a tanker at sea than take delivery of it.

This, coupled with the demand slump, is why you’re seeing the price of oil remain relatively stable at the moment. But although the relief is pretty nice right now, enjoy it while it lasts, as it certainly doesn’t mean we’re done with volatility. For more on the outlook for the oil market, check out my colleague (and commodity expert) Lee Lowell’s “Commodities Corner” column from this past Monday.

That’s all for this week. Have an enjoyable and relaxing extended weekend.

Martin Denholm
Smart Profits Report