Hey There Income Hunters,

European interest rates have been trending higher the past few weeks, and I’ve been watching this closely.

So, now we have the UK, Europe and US all in tightening mode, with the UK as the first mover followed by the US and the European central bank pulling up the rear. 

Notice the chart below as both Italy is beginning to show signs of stress due to soaring interest rates and high levels of debt: 

Higher rates in Europe can produce problems for the US in terms of providing an alternative to US bonds – and, by extension, you.

Where are the right alternatives? Andrew Giovinazzi and I will cover that (and a lot more) LIVE this Thursday at 8 p.m. Click here to join us.

But first, I’ll break down the risk to the Eurozone and what that can mean on this side of the pond.

Let’s take a look.

Credit Spreads Showing Signs of Bank Stress

I’m always on the lookout for signs for credit spreads widening. This is so important because it shows corporations may not be able to get the funding required to run their businesses.

Once lenders know a company may be having trouble, the word spreads quickly and the company may have to pay much higher rates.

These signals let you know to hedge your exposures to the market. You see, when capital is tight, companies must sell assets to avoid insolvency, and many firms with high debt may fall, as well. 

What makes the Euro story a bit worrisome is the amount of debt-to-GDP held in Europe – 130%, which is an unsustainable level.

Global Bank Credit Spreads

It would make sense for European markets to crash before the US.

First, because the US bond market is so deeply liquid. Second, as a reserve currency, dollar bonds are much more in demand than European bonds. 

If Europe did enter a debt crisis similar to its crisis in 2011, it would put even more pressure on the US because of all the loan exposure that US banks have to Europe.

Notice in the chart below how the credit spread of Intesa, the number one bank in Italy, is getting blown out.

We are also seeing a lift in the credit spreads for Goldman Sachs and Morgan Stanley, but from very low levels.

These are important warning signs and you can find some very good trade ideas when you spot these trends.

Here is a trade idea to capitalize on weaker bank earnings ahead:

SPDR Select Sector Fund ETF (Ticker: XLF)

When interest rates are rising, bank stock prices rise because the increased volatility raises their trading profits.

However, when the Fed executes quantitative tightening (QT), it is draining reserves directly from the banks and this removes funds used for trading.

QT also puts much more pressure on the valuation of bank assets held on their balance sheets. So, as assets are sold to generate liquidity, banks lose significant capital. 

The chart below illustrates the amount of stocks and bonds in aggregate held on commercial banks’ balance sheets. 

With the economy in a State 4 bear market plus coming to the end of its long-term debt cycle, the risk of a meltdown in financial assets as the economy weakens is high.

At some point in the near future the banks will have to lighten up or hedge that risk and that could trigger a market crash. 

So, as the Fed begins QT in March, setting up a bear trade in XLF or the SPDR S&P Regional Bank ETF (Ticker: KRE) is a low risk/high reward trade …

Bring It Home

It is time to think outside the box. When you have an economy and a financial system in the condition the US is, as a trader you want to find alternative markets to trade.

And that’s good news for you.

Tomorrow night 8 p.m. I will be going live with Andrew Giovinazzi to give you our best alternative investment strategies – plus EXCLUSIVE trades.

These strategies are designed to first protect your wealth as the Western equity markets go into a deeper bear market in the months ahead. 

And by understanding the impact of inflation and monetary tightening at the same time, you can capitalize on the Fed’s Big Mistake that will be made heading into the summer.

I will present multiple trade ideas and explain in detail why each is positioned to pay off, while Andrew will explain the lowest risk/highest reward strategy to maximize your return on each.

Be ready for an eye-opening and profitable hour of macro insight.

Until then …

Live and Trade With Passion My Friend,

Griff