European worries seemed not to have fazed investors as 2012 has kicked off. The S&P 500 posted a gain of 1.55% while major European and Asian indices also rose. Nevertheless, the Euro didn’t move much, finishing the day at $1.31/Euro.
Also, it looks like investors perceive a slightly less risky environment as the 10-year Treasury yield went up to 1.96%. In commodities, gold and oil skyrocketed 2.42% and 4.19%, respectively. Overall, there were big movements across the market and higher trading volume after last week’s lull.
However, the Eurozone’s future doesn’t look promising. Greece has said that it might leave the euro in 3 months if it can’t agree on additional bailout. There is still no resolution regarding the bond haircut while further austerity is needed. A Greece exit, disorderly or not, would be incredibly destabilizing and have a highly adverse impact on global markets. It is the looming possibility of such an event that keeps me sticking to a low risk portfolio.
Prospects of unity are becoming increasingly difficult as Eurozone nations follow divergent paths. While Germany has hit a 20-year low in unemployment, Spain’s unemployment rate is now at an astronomical 23%. I simply can’t see how the Eurozone can continue operating in a manner where lagging nations such as the PIIGS have to be subsidized by more financially disciplined countries such as Germany.
But Germany is having a bit of a political crisis of its own at the moment due to financial impropriety from a senior German official. And Merkel’s silence over the matter has questioned her credibility. As if economic chaos isn’t enough, this is the last thing Germany needs.
In an interesting move, the Fed announced that it would start publicly disclosing its interest rate forecasts. With all eyes on whether the Fed will institute QE3 to buoy the economy, some increased transparency with less uncertainty about Fed actions should hopefully reduce overall volatility.
In economic data, U.S. manufacturing hit a 6-month high. However, I’ll be looking more to Friday’s jobs numbers as a better indication of where the economy is situated.
Meanwhile, it looks like China’s woes will continue as China’s Premier Wen Jiabao foresees further economic weakness due to reduced export volume.
I can’t say how 2012 will ultimately turn out, but I project at the least the first half of the year to be challenging to say the least. Until we get clearer signs of improvement, a majority bond/sector ETFs and cash position is the way to go.Contact Ulli