After yesterday’s dip, equity ETFs made up lost ground and then some as the S&P 500 gained 1.10%. The 10-year bond also moved back up to hit a yield of almost 2%. Overall, there have been large fluctuations in risk perception.
There was a spate of positive economic news that contributed to equity bullishness such as a 4-year low in jobless claims as well as an increase in housing starts in January.
However, the spotlight is on Greece. The Greek finance minister announced that a bailout deal could come as soon as Monday, but we’ve already heard this story before given the number of countless delays. Until a deal is finalized, I have no reason to breathe a sigh of relief.
As conditions haven’t improved, Moody’s announced that it has put 114 European banks on a downgrade watch as the debt debacle drags on. The banks are still making record high deposits with the ECB, making for a challenging lending environment where credit isn’t effectively flowing through the system.
In the hopes of arriving at a resolution, European leaders are making a bailout proposal with a number of strings attached. For instance, other countries will essentially serve as a watchdog to oversee how much and where Greece is spending money.
Furthermore, leaders have suggested instituting an account where Greece must have enough cash to cover short-term debt obligations. A failure to meet minimum cash levels could result in not receiving additional aid. At this point in time, Greece isn’t far from the chopping block.
Meanwhile, the rest of the Eurozone has its own fair share of problems. Italy has fallen into an official recession as its GDP fell for a second consecutive quarter in Q4. Portugal is facing further strain as well with its unemployment rate now at a record 14%.
In China, it appears the government has come to realize that there is an economic slowdown. China’s chief economist expects that the country’s 2012 GDP target will be below 8%, its lowest level in 8 years. As China grapples with an overheating housing sector as well as a significant reduction in exports, economic difficulties will likely lie ahead.
While I hope that U.S. markets won’t be markedly affected by bad news abroad, we have to err on the safe side. It’s imperative not to increase your risk appetite too much as Europe continues to lag behind, unless you control the downside risk via a solid exit strategy.
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