Markets appeared to be in risk off mode today as equities brought their bull horns out. The S&P 500 gained 1.11%. The NASDAQ also had a big day, gaining 1.53% to keep the tech rally going.
Also, the Euro bumped up to $1.29/dollar while the 10-year Treasury yield rose to 1.90%. I think there’s still plenty of risk left on the table, but this has been a precarious January so far to say the least.
Some of this exuberance could warrant some additional equity exposure, which we’ve done to a small degree. Some sectors have done especially well this year such as materials and financials although whether this can continue is the big question.
After a delay, the bickering between Greece and bondholders resumed today to see if they can come to an agreement over a debt haircut. The hedge funds have been especially resistant, although the idea of offering bonds with a higher coupon was received positively.
As to how Greece will pay for this, I am clueless. Perhaps Seven Myths about the Greek Debt Crisis from UC Irvine economics professor Stergios Skaperdas can illuminate why Greece needs to leave the Eurozone.
A sign of the severity of Europe’s situation, the IMF has decided to boost its lending facility to over $500 billion. Although some countries believe Europe has the ability to weather its own storm using its own financial resources, I beg to differ. The IMF already estimates that Europe will require $1 trillion in funding needs over the coming years.
Meanwhile, the World Bank came out with a stark warning about a global recession. Revising its 2012 global GDP growth down to 2.5%, the World Bank foresees a slowdown on par with happened at the outset of the financial crisis.
The Eurozone is already expected to have GDP contraction while growth across the develop world will be marginally positive at best. It’s this type of scenario that justifies my overweight in bond ETFs as the market bottom can fall out any time soon.
Although we’ve seen a drop in U.S. unemployment as of late, the numbers are a bit deceiving. According to a recent report, over 90 percent of metro areas still haven’t recovered job losses from the recession ending in 2009. In essence, the economy still has a long way to go before it fully recovers.
As I mentioned previously, I’ve seen some improved momentum figures that have given me reason to add some equity exposure. Nevertheless, I am sticking with a variety of bond ETFs in case a steep drop occurs.
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