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Rising Eurozone Recession Risk Stokes Contagion Fears in U.S.


With so much talk about trickle down economics throughout the recent campaigns, it got me thinking this morning about the effects of what I call, spill over economics. That is, the impacts felt by one economy as a result of something happening in another economy. You may have heard it referred to as "contagion" or something similar, but one of the great risks in the minds of investors right now is that Europe's problems will become ours, just as China's slowdown has become Europe's headwind.

"On some level, that is the principal concern," says Peter Kenny, managing director at Knight Capital, in the attach video. "There are questions about Germany's ability to keep the entire EU positive in terms of GDP."

Related: Investors Run for Cover as Europe Takes Spotlight

Kenny's worries come as the European Central Bank and its new president, Mario Draghi, make no secret that they are seeing signs of weakening in the region's biggest economy, thus facing downside risks to the growth for the whole region. That's not to say the Europeans are panicking yet. The ECB held off another rate cut, and are also patiently waiting for their fourth round draft pick (Spain) to admit what everyone else already knows --they need to ask for a bailout. But if you add in concerns about our own fiscal cliff, as well as our slow-to-no earnings growth environment, it's clear to see why the risk-off crowd appears to be growing, albeit modestly and in an orderly fashion (so far).

So here is where we get back to spill over economics again. As the Knight Capital strategist points out, the German/Eurozone drama could very well ''see some stabilization" if recent signs of an uptick in China continue. Likewise, the Chinese slowdown could, itself, be helped if a fresh round of stimulus is announced by Beijing alongside communist party leadership changes this week.

And that brings us back to the U.S., where Kenny says "there's a positive under-pinning to all this negativity." Specifically via signs that demand in housing and real estate are picking up and we've just seen an uptick in home prices and a downtick in inventory.

Together, it has created a scenario that is tenuous, but not disastrous, and if we get the right amount of positive spill over, could reverse itself quickly.

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