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How to Profit From ECB President's Warning of Systemic Threat to World Economy

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No matter how the eurozone crisis plays out, these ETFs are worth the savvy investor's look.

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European Central Bank President Jean-Claude Trichet warned the European Parliament in Brussels on Tuesday that the financial crisis facing the eurozone is systemic and that Europe's leaders must take decisive action in order to prevent it from escalating and spreading. Trichet will soon be stepping down from the European Central Bank and is pushing eurozone leaders to come up with a plan to recapitalize the European banking sector.

French President Nicolas Sarkozy and German Chancellor Angela Merkel have already agreed that eurozone banks will be recapitalized, but Europe's leader still need to announce a formal action plan. They have delayed because some European leaders like Sarkozy are concerned that by taking on much of the banking sector's risk, eurozone governments could see their credit ratings lowered and their borrowing costs rise.

Europe is also awaiting the outcome of a vote in Slovakia to approve the European Financial Stability Facility (EFSF) expansion. Slovakia is the only eurozone country that has yet to approve the EFSF expansion that is needed in order to give eurozone officials more firepower to prevent a financial catastrophe.

There are a number of investment options to consider, depending on how the current eurozone financial turmoil plays out.

Investors could simply short the euro with ETFs like the Market Vectors Double Short Euro (DRR) and the ProShares UltraShort Euro (EUO). As long as the viability of the eurozone is in question, the euro will be under downward pressure. Although it looks like eurozone leaders will soon agree to formal plan to recapitalize the banking system, such a move could still hurt the euro as governments assume much of the risk that banks are currently holding.

Asian markets are particularly sensitive to economic news from Europe because the export driven Asian economies depend on exports to Europe for much of their economic growth. If the situation in Europe worsens with a Greek default, other troubled countries like Ireland and
Portugal might consider defaulting or forcing investors to restructure the countries' debts. Even if such a scenario never occurs, just the possibility of it happening is enough to drive Asian stock prices lower.

Investors who feel that European plans to recapitalize eurozone banks won't be enough to prevent a looming financial crisis might want to short Asian stocks by purchasing the Direxion Daily China Bear 3x Shares (CZI), ProShares UltraShort MSCI Japan (EWV) or ProShares UltraShort MSCI Pacific (JPX) ex-Japan ETFs. These ETFs could climb much higher if the growth prospects for China, Japan and other Asian economies take a hit because of a worsening eurozone financial crisis. Moody's Investors Service has already placed Belgium's credit rating on review for possible downgrade because of risk that the Belgian government is taking on to support the country's banking sector.

Investors who feel that European leaders' plans to recapitalize the eurozone banking sector will effectively end much of the market turmoil in Europe might want to consider buying European financial stocks through the iShares MSCI Europe Financials (EUFN), which is an ETF made up of a wide range of European financial stocks. Once the eurozone's financial crisis passes, European financial sector stock prices could move much higher.

Editor's Note: This content was originally published on Benzinga.com by Daniel James Hayden IV.

Below, find some more great ETF and market content from Benzinga:

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By Jonathan Chen

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By Scott Rubin

The Next Time You're Bullish on a Stock, Just Remember -- It's All in Your Head
By Louis Bedigia

Twitter: @Benzinga

No positions in stocks mentioned.

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