After a stellar performance for equities last week, Halloween scared off investors to make markets end the month on a low note. Major indexes took a sizeable dip, with the S&P 500 falling 2.47%. Also, after recent dollar weakening, the dollar came back up to $1.38/Euro. Most startlingly, the VIX jumped a staggering 22.14%, nearly hitting the 30 mark.
It was about time that markets seriously considered Europe’s bailout funding uncertainty after last week’s seemingly irrational exuberance. Sure, Europe finally made some progress last week, but a concrete EFSF funding plan still doesn’t exist. That’s enough reason to continue exercising major caution.
Greece still isn’t completely resolved as it enters a contentious political debate surrounding whether or not it will accept its bailout package as PM Papandreou called a referendum.
Essentially, the perception that Greece may have been saved is seriously up in air. Even more surprising, most Greeks are against the bailout package. Last week’s equity ETF jubilation just might be undone soon if we the reach the final act of this Greek tragedy sooner than expected.
And as if Greece isn’t enough to worry about, the Italian situation has proven difficult to manage. Italy’s disappointing bond auction clearly illuminated that its debt load is a grave concern. To put it mildly, Italy’s economic woes and political turbulence are putting the EU at risk.
Spain is also becoming an increasing concern given its anemic 3rd quarter GDP growth and its deplorable unemployment situation. The country’s deficit is still out of hand and it’s caught in a trap where austerity will only exacerbate its economic problems.
In Asia, the Japanese Central Bank intervened in currency markets to help weaken the yen in order to boost exports, sending commodities such as gold into red. The possibility of currency wars arising could pose some additional headwinds to markets and cause other financial disruptions.
Nevertheless, the key focus is still Europe. The extent of market volatility hasn’t subsided one iota and, although I’ve introduced some equity exposure, days like today not only reinforce the need for my strict stop loss sell discipline but also make me wonder how much starch is left in the upward momentum. With this much risk on the table, we want to ensure that we have all our bases covered while carefully moving into select equities.Contact Ulli