The week started off on a bad note, as major market ETFs swung to the downside. The S&P 500 dropped 1.17% while other U.S. indices performed similarly. The dollar stayed at $1.30/Euro while commodities didn’t move much.
Keeping in line with the uncertainty in Europe, investors continued to flock toward Treasuries, with the 10-year Treasury falling to a yield of 1.81%, the lowest since early October. Although the VIX index may not show how risky the market is, the shift toward fixed income highlights the greater possibility of a long-term downside scenario with equities.
As I talked about in my weekend article about quantitative easing, the implementation of QE3 could push equity ETFs into bull territory given the gains seen during QE1 and QE2. Whether QE3 could offset Europe’s problems is up in the air though.
The ECB has said that the contagion threat is reaching a critical level as to how far it can spread, especially with very high volatility in bond markets. Also, ECB President Mario Draghi suggested a possible Eurozone breakup given current conditions, which has irked those vying for EU unity. Furthermore, Draghi stated that stricter fiscal unity measures need to be instituted.
Adding more drama to the EU’s bailout difficulties, the UK has refused to offer aid via the IMF, creating a shortfall of roughly $65 billion in the desired $260 billion package. Although the UK wants to distance itself from the rest of Europe, this has created additional tension while still leaving the UK exposed if contagion spreads further.
In Spain, the situation gets bleaker by the moment as PM Rajoy announced over $21 billion in austerity measures. A combination of higher debt funding costs and more obstacles to restoring economic growth, Spain is very much stuck in a rut. Spain and Italy alone could bring down the Eurozone given the amount of debt on each country’s books.
In non-Euro developments, North Korea dictator Kim Jong Il died yesterday, so we’ll have to see if this will translate to turmoil in the Asia region. With nuclear weapons and a questionable succession plan, an unstable North Korea could negatively impact Asian markets in the coming days.
If anything is certain at this point, it’s that the global market atmosphere has become increasingly bearish. As we tread violent market tides, a majority bond ETF/cash position is a sturdy lifeboat for now.
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