How is recession in stock market?

Why is the European stock market dropping with reports of the US recession?

• Break it down. I'm kind of lost. I understand that the Europeans and Asians are invested in our financial market and the European export will be affected, but the weak dollar ...show more

• Answer:

  First, we need to see what is the culprit behind the looming recession. While recessions are a normal part of the business cycle, this one is not. Europe's economy is tied into the US. So when the Subprime issue came up, followed by the Credit Crunch, the effects felt in the US were quickly felt in the UK and Europe. The reason being is that the U.S. Financial sector makes up about 20% of the US market, and when they got burned by this, so too did their investors (big and small) that invested in these Financial Companies. Moreover, we are part of a global economy, and while the Subprime issue occurred in the US (and is now creeping into the UK), the US banks weren't the only ones issuing out teaser Adjustable Rate Mortgages to the US Market, the UK and European banks were doing the same. So, they were just as much in the thick of the mess as the US Banks. Okay, flashforward to today. The US economy is slowly stumbling, and the UK economy is about to follow suit with the US. To keep the economy from imploding, the US Fed lowers its Fed Funds rate. When this happens, the US dollar starts to drop in value. Now, you are correct that a weak USD equals a stronger EUR, but that isn't the whole problem. With the USD dropping, the exports Europe sends to the US (which is a massive staple to the European Economy) become expensive. Not just because of the weaker dollar, but also because of the stronger Euro. So, with money being tight during an economy on the brink of recession, the US consumer cuts back on spending, and when they do spend, they spend on the cheap. This means a drop in revenue on exports to the US. See the rub here is that the signal from the consumer(US) to the product(EU) isn't right away. It takes a few months. And so, right now, the US consumer has cut back on their spending....but the EU producer has sent out their inventory based off of projected demand levels that were running off of November's Data...data that isn't all that accurate now. So, with an excess inventory, and no one buying their products, EU stocks take a hit. So the changes in the US consumer's spending, the fallout of the Subprime/Credit Crunch and their involvment in the Subprime/Credit Crunch; all have an impact in the European Markets. Now, this is just looking at the US...the same thing is occurring in the UK. And the more the US Fed lowers rates in order to keep companies from firing people (cause consumers need to get their money from somewhere in order to jumpstart the economy) the more the USD will drop in value and therefore the more expensive EU imports into the US will become. Hope this helped. This is just one of many factors that is creating this situation, so I went with the easiest, cleariest one to explain.