The markets remained in rally mode, since last week’s report, on the basis that politicians will actually be able to find a solution to solve Europe’s ever growing debt problems.
All of our ETF model portfolios inched higher, but to a lesser degree than the S&P 500, due to a less than 100% invested position, which has smoothed out the ride.
However, on a YTD basis, most of them are still ahead of the benchmark index. Take a look at the latest update:
Europe is going through turbulent times, but markets didn’t seem to care as the S&P 500 rose 1.17%. Other indices such as the FTSE and DAX also ended in the green. However, these weekly up and down swings are disconcerting as markets quickly transition between risk on and risk off modes.
Confirming my concerns, Italy is now stuck in a very tight spot politically. Berlusconi failed to reach a majority in yesterday’s budget vote, heeding calls for him to step down in order to prevent a potential market panic. The plan is for him to bid his “Arrivederci” once an austerity budget is passed.
An indication of escalating borrowing costs, Italy’s 10-year bond hit a high of 6.77%, highlighting a real risk that Italy won’t be able to pay off its debt. As a larger economic force, a financial meltdown in Italy could trigger greater widespread contagion throughout Europe. Whether Italy has the political will to muster a turnaround remains to be seen, despite the perceived optimistic investor sentiment seen today.
Despite the European turmoil at the political level, markets responded positively as the S&P 500 gained 0.63%.
The dollar remained relatively unchanged versus the Euro, staying at $1.38/Euro. Oddly enough, the Volatility Index was relatively flat, dropping 1.03%. While markets might be saying that Europe might be working to solve its solution, I still believe the worst is far from over. Equity ETFS are destined for a big shakeup sometime soon, unless a credible debt solution is planned and implemented.
Whereas much of the focus as of late has centered on how the Eurozone could create an economically viable bailout and bank recapitalization package, the spotlight now turns to politics.
Though it’s not official yet, Greek PM Papandreou is planning to step down, making the way for a new coalition government. While some might argue that a new coalition government might benefit Greece, the uncertainty surrounding how a new government plans on tackling the country’s debt issues is rather unsettling.
I neglected to include the HV Cutline figures in Friday’s commentary. Here’s the latest report showing that currently only 16 ETFs remain on the bullish side of the trend line, while 76 hover in bearish territory:
http://www.successful-investment.com/SSTables/HVETFCutline11042011.pdf
In case you missed it, here’s a summary of the ETF topics and market reviews I posted to my blog during the week ending on 11/6/2011.
A sharp pullback during the first two trading days of the week kept the major indexes on the minus side as uncertainty in Europe flared up again. While Greece took center stage, Italy’s enormous debt gave markets reason for concern as bond yields rose to record highs.
It remains questionable if the EFSF can scrounge up enough money to bailout Italy as well, should that become a necessity. Markets will continue to react to the latest headline news about the European debt crisis, which will keep volatility high and market direction questionable at best.
Still, the trend is up, and we’ll carefully follow its direction.
This week, we covered the following:
Right when it seemed like Europe was making some progress with EFSF expansion and a bank recapitalization plan, Greece’s woes have soured the mood once more.
With the referendum proposal and subsequent reversal this week, the political upheaval in Greece has reached a fever pitch as Papandreou might step down, creating further uncertainty. EU leaders have already expressed their discontent, demanding that Greece break away from the Euro currency.
As the possibility of a disorderly Greek default comes into the foreground, our sights are also on Italy, the next in line so to speak. Although default and Italy haven’t been mentioned in the same sentence, the country’s escalating borrowing costs in tandem with its debt load, which is at 120 percent of GDP.
This week’s video gives a breakdown of how a negative event in Greece may spread to and impact Italy. To say the least, next week could be a rocky ride for equity ETFs if the downside becomes apparent.