Markets suddenly were in a bullish mood today as indices worldwide moved to the upside. The S&P 500 jumped 2.98% while European indices such as the DAX gained 3.11%. However, the Euro didn’t move much against the dollar, ending at $1.31/Euro.
With equity ETFs gaining, bond ETFs didn’t fare as well. The 10-year Treasury had a large price decline, resulting in a yield of 1.92%. Yet, this doesn’t detract from the fact that there is still plenty of risk on the table. I believe that today was a momentary blip (we’ve seen those before) that is unlikely to persist.
The big announcement of the day was better than projected U.S housing data. According to the Commerce Department, there were 685,000 new homes last month, a 9.3% increase from October. This is certainly a positive indicator for the economy, but there is still a lot to overcome, as seen in this past Sunday’s 60 Minutes housing piece.
On the other side of the Atlantic, Spain had a successful bond auction with greater demand than expected, resulting in lower borrowing costs. But at the heart of it all, Spain’s debt load is astronomical and has poor prospects for growth in the real economy due to austerity measures.
In Germany, business confidence exceeded estimates, which is an encouraging sign. In my opinion though, these types of indicators have little bearing on Europe’s long-term financial stability (or lack thereof) and economic growth.
Seeing how everything is intertwined, Eurozone issues have negatively impacted U.S. mortgage-backed securities. European banks are selling a large amount of mortgage-backed securities outside of Europe as their liquidity concerns become more apparent.
Although ECB President Draghi has essentially set up long-term zero-interest loans for European banks to get credit flowing, these alternative measures by banks may still be necessary to fill their own monetary gaps so to speak.
Back on Italian soil, the country’s biggest banks were downgraded by Fitch, which has also put other Italian as well as Spanish and French banks on ratings cut alerts. The downgrades just don’t seem to end.
Although today was a surprise to the upside, one can’t deny that the overall situation hasn’t improved, and risk certainly hasn’t receded. Blips may happen here and there (often powered by short covering), but as I look to the long-term, a bond ETF driven allocation is the most prudent course of action.
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