All the Christmas goodies have seemed to wear off as attention once again turned to the dire state of the global economy. The S&P 500 had a decent sized drop of 1.24% while European and Asian indices also headed south.

The Euro went to a new 11-month low against the dollar, falling to $1.29/Euro. Commodities also took a hit as oil dipped below $100 and gold crossed under the $1,600 mark.

Just when it looked like risk was withering away, the 10-year Treasury yield sank, ending at 1.91%. Meanwhile, the Volatility Index rose 7.30%, indicating that more volatility might be headed our way. It looks like negative 2012 expectations are finally setting in.

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In a relatively low volume day, market action was more or less at a minimum. The S&P 500 was essentially flat, bumping up a smidge of 0.01%. The Euro against the dollar is $1.31/Euro and the 10-year Treasury dropped to 2.01%. In commodities, gold is still off its high sitting just above $1,600 while oil broke above $100.

A sign of fear in the European banking system, banks deposited over $535 billion with the ECB, a record amount. Despite efforts by the ECB to boost liquidity and spur lending, many financial institutions still view lending as much riskier than camping their money with the ECB.

Not only will this hurt the credit market, but businesses of all sizes will feel the hurt as well. Although Europe is reaching deep into its toolbox, finding the right tool to solve its financial woes is becoming increasingly difficult.

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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 12/25/2011.

The markets catapulted higher, although on very low volume, which tends to distort the true direction, but it gave the impression that a Santa Claus rally had actually materialized, which brought the S&P 500 back to the breakeven point for the year.

With most traders gone on vacation, there is no telling what next week may bring and whether this is the start of new bullish momentum, or just a flash in the pan that can evaporate as soon as Wall Street’s heavyweights return on the first trading day of the year.

Much will depend on developments in Europe. Any lack of bad news may give the domestic indexes a run to the 1,300 level as most domestic economic news has been better than elsewhere.

This week, we covered the following:

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As we turn a corner into a new year, great uncertainty still looms in global markets. Europe lacks the financial firepower to overcome the debt crisis at the moment and political resolve is quite thin. Meanwhile, the rest of the world is prone to contagion.

In this week’s video, I am highlighting Michael Platt, a hedge fund manager who is solely sticking to short-term U.S. Treasuries and German bonds. As argued by Platt, and in line with my views, Europe still faces very large hurdles to restore economic growth and reduce its debt load, prompting a heavily fixed income weighted allocation with lower risk exposure.

While I wouldn’t necessarily be 100% on the sidelines in fixed income since there are still some select equity ETF opportunities, the overall message is right on. Europe’s debt metrics are atrocious and illiquidity in the European banking system is of great concern, with many banks inching toward insolvency. Plus, borrowing costs are still high in Spain and Italy with other Eurozone members at risk of losing their investment grade status.

Although I don’t want to be a pessimist, markets will continue to experience significant headwinds in 2012. Let’s enjoy the holidays while we can before reality sets in again.