Perhaps investors came to the realization that all is not well in Europe as markets simmered down. The S&P 500 inched up only 0.22% while Europe and Asia posted marginal gains as well. The dollar still remained at $1.33/Euro, and commodities bumped up a little.
Also, the VIX fell once again, dropping 4.64%, though still above the 30 level. Some risk has been shaved off, but we’re still in risk on mode. There’s plenty of volatility hanging around as Europe’s fate is up in the air. Equity ETFs simply aren’t very tempting at the moment in this type of environment.
Meanwhile, it looks like Europe will require serious help from the IMF as EFSF expansion plans have been faltering. However, there was a statement saying that the EFSF will insure 20-30% of investor losses and plans on intervening in markets next month. Unsure of whether they can leverage the EFSF to over $1 trillion, most European leaders concur that IMF assistance will be necessary to aid countries overburdened with debt.
Additionally, some Eurozone members want the ECB to go beyond its typical duties and play a critical role in the bailout via loans and other forms of intervention in the wake of skyrocketing bond yields across Europe. Considering that IMF Managing Director Christine Lagarde said the IMF may not have enough funds to dole out if the European situation worsens, ECB intervention may soon become a reality.
And Italy had another rough day as its auction of $10.1 billion in bonds resulted in yields above the 7% level. Demonstrating the level of pessimism in Italy, its 10-year bonds are over 5% higher than 10-year German bonds, sitting at 7.36%.
Furthermore, a report from the ECB and European commission states that Italy is quickly approaching insolvency. The issue of rampant tax evasion, which is 20% of Italy’s GDP, was highlighted as an area that must be combated to offer an inkling of hope to put Italy back on a sustainable path. As Nouriel Roubini has noted, Italy needs to restructure its debt as its burgeoning yields push the country closer to the brink of default.
At this point, while markets seem unable to make their minds about which direction to go in, I’m largely sticking to the sidelines in the wake of this persistent uncertainty pointing to the downside.
Contact Ulli
Comments 2
I do about 30 trades per day, what I see is a rigged market that needs fresh money to keep the ponzi up giving no or very little return to the investors.
ulli,
is this what is meant by the admonition to “be patient”? while europe dithers away the weeks and months with meaningless rhetoric, we just sit here on the sidelines.
george, of course the market is a rigged zero-sum ponzi scheme. but that doesn’t mean that money can’t be made. now that you know it’s rigged, it should be easier to play.