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Friday, June 29, 2012
EXUBERANCE RULES ON EU PLAN FOR SPANISH LENDERS — BUT WILL IT LAST?
US stocks soared Friday with the Dow recording its biggest monthly gain in 2012 as European leaders struck a ground-breaking deal to bolster the economies of the affected members, pushing all the three major indexes up by more than five percent in the first-half of the year. Supporting the rally were short covering and quarter ending window dressing.
EU leaders agreed to ease lending conditions for Spain’s struggling banks and relaxed terms of possible help for Italy while consenting to a $149 billion economic growth plan for the single-currency region. At this point, it’s all euphoria, as we’ve seen before, and it remains to be an open question if this plan not only has merits but can actually be implemented.
One analyst succinctly stated that “for now, party on and turn that hourglass over as more time has been bought, but only the symptoms are being fought as the underlying disease of excessive debt and lack of growth still remains.” Well said. Next week will show if this “surprise” announcement has the depth to alleviate the uncertainty that have gripped global markets.
As risk sentiments improved, the US 10-year yield climbed the most in nearly three months pushing Treasuries down after investor worries eased on the viability of the eurozone in its current form.
The Dow Jones Industrial Average (DJIA) surged 2.2 percent with 29 of the 30 components finishing higher. The S&P 500 Index (SPX) vaulted 2.5 percent with industrials gaining the most among its 10 major industry segments. The index is now up 8.3 percent year to date and has added 4 percent for June.
Yield on 30-year bonds jumped nine basis points, the most in more than two weeks, to 2.76 percent after adding as much as 10 basis points in intraday trade. The yield on the benchmark 10-year notes rose seven basis points to 1.65 percent after EU leaders agreed to infuse capital directly into Spanish banks under the ECB’s supervision and hoped to sign a deal by July 9.
ETFs in the news
As European leaders formally announced steps to recapitalize Spanish banks by directly injecting cash into them and eased terms of possible aid to Italy, global markets rallied. However, the jury is still out as to whether paymaster Germany will agree to the exact terms of these headline grabbing announcements.
Needless to say, the two of the biggest beneficiaries Spain and Italy saw their borrowing costs tumbling, with Italian 10-year yield falling by 42 basis points to 5.78 percent while Spanish 10-year yield shaved 62 basis points to finish at 6.32 percent.
Up 8.44 percent for the day, the iShares MSCI Italy Index Fund (EWI) remained among the top gainers. EWI tracks the performance of the Italian equity market. Italy’s main stock exchange, the Milan-based FTSE MIB closed 6.6 percent higher, marking its best gain since May 10, 2010.
The iShares MSCI Spain Index Fund (EWP) also sizzled, surging 7.27 percent. EWP tracks the performance of Spanish equities and Madrid’s benchmark IBEX added 5.7 percent for the day after Angela Merkel removed the region’s rescue fund, the ESM’s preferred creditor status on Spanish bank loans. This removes the deterrent for private investors who were wary of taking the first hit in case of a debt restructuring.
Down 6.46 percent for the day, the Barclays iPath S&P 500 VIX Short Term Futures ETN was among the day’s biggest losers. The fund opened sharply lower as the CBOE Volatility Index (VIX) slumped and slipped further as the day wore on. VIX slipped 13.34 percent to 17.08. Any reading below 20 suggests low fear level.
Our Trend Tracking Indexes (TTIs) improved with the markets and ended the week as follows:
Domestic TTI: +2.38% (last week +1.60%)
International TTI: -2.15% (last week -3.05%)
Have a great week.
Disclosure: No holdings
READER Q & A FOR THE WEEK
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A note from reader David:
Q: Ulli: Why do you stress the movements of UNG and natural gas in your blogs? Is it so widely followed?
A: David: I am not stressing them for any particular reason other than they pop up as part of my daily ETF report about winners and losers. They have been on the losing side for a long time, so it’s no surprise that occasionally they demonstrate a dead cat bounce and move into winner’s column.
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