There has much debate if and when Spain would request for a full-fledged bailout from the European Central Bank. There’s not much clarity on the International Monetary Fund’s role in the whole process.
For the ECB to officially start the Outright Monetary Transaction (OMT, which is synonymous with the bank’s unlimited bond buying program from the secondary markets) for a particular country, two conditions – apart from an independent assessment by the ECB’s governing council, need to be met separately, and the involvement of the International Monetary Fund is one of the prerequisites, explained Joerg Asmussen, an Executive Board member of the ECB.
The other condition is seeking support from the European Stability Mechanism (ESM), the region’s emergency fund, officially.
Both the ECB and the IMF stands ready to help when needed. The distressed country needs to sign a memorandum of understanding agreeing to the reform conditions before the OMT kicks in, he observed. Asked if Spain has shown any interest in seeking the central bank’s help at the ongoing summit in Tokyo, Asmussen answered in the negative.
The ECB has agreed to renounce seniority over private creditors once the OMT is activated, giving the impression the central bank is prepared to take losses. Asmussen disagreed, saying it is a wrong impression since it assumes sovereign borrowers will default. The ECB is not expecting any default by the borrowing countries and hence will not accept any haircuts, he clarified.
FlexShares, the ETF arm of Northern Trust, has launched its first actively managed exchange traded fund, the Ready Access Variable Income Fund (RAVI), aimed at folks who wish to maintain liquidity but seeking that extra yield without exposure to excessive volatility.
RAVI can be a good choice for people wishing to park funds in a safe place in the short run, for which return of capital is more important than return on capital in times of excessive fluctuations. The cash management fund has a variable net asset value and can invest beyond the restrictions of the traditional money market funds. The fund banks on Northern Trust’s cash management legacy while leveraging the trading benefits of an exchange traded fund with a variable NAV strategy.
Historically, cash funds face many challenges including low interest rates and a small supply of suitable securities and a higher demand for these securities. These factors make it difficult for investors to find cash funds with competitive returns. RAVI’s portfolio consists of investment grade debt securities from around the world, including corporate and sovereign bonds from different geographies.
MAJOR ETF MARKET INDEXES FIZZLE; GROWTH FEARS DRAG EUROPE
US equities closed mostly lower Friday capping off their worst week in four months as worries over Europe offset early optimism over a surprise rise in consumer confidence.
Risk sentiment had improved earlier after the Michigan University/Reuters Consumer Sentiment Index jumped to a five-year high of 83.1 in October. The relief however, proved fleeting after a Labor Department report revealed the producer price index rose 1.1 percent in September, beating estimates and stoking worries of inflation. Government officials attributed the spike to a rise in energy and food prices.
Giving up a 75-point rise during the session, the Dow Jones Industrial Average (DJIA) managed to add only 2 points on the day, off 2.1 percent for the week; the blue-chip index witnessed its biggest weekly decline since June 1.
Not to be outdone, the S&P 500 Index (SPX) shed 4 points for the day, down 2.2 percent over last Friday with financials faring the worst and consumer staples pacing gains among its 10 business groups.
Treasuries gained for the fourth straight day as demand for safe haven assets spiked following a report in the International Financing Review that suggested the European Stability Mechanism is ill-prepared to rescue Spain if the country were to need help before the end of the year.
Yield on the benchmark 10-year Treasury notes fell one basis point to 1.66 percent while 30-year Treasury bond yield fell two basis points to 2.83 percent.
Meanwhile, the US dollar lost ground while the euro found modest support amid speculations over an imminent bailout request by Spain. The ICE dollar index, a gauge of the greenback’s relative strength against a basket of six currencies, slipped to 79.677 from 79.781.
Across Atlantic, the Stoxx Europe 600 index trimmed losses in late afternoon action after a surprise jump in US consumer confidence in October. The mood was also lifted after European industrial production data revealed a 0.6 percent expansion in August, indicating the region’s GDP did not contract as sharply as the more downbeat recent surveys suggest. Off 0.5 percent for the day, the pan-European benchmark is lower 1.7 percent over last Friday.
The German DAX 30 index ended 0.7 percent lower after index component Siemens AG dropped 1.1 percent on the day. Societe Generale cut the conglomerate’s rating to hold from buy.
Banks rallied across Europe with shares of Standard Chartered Plc and Lloyds Banking Group Plc rising 2.3 percent in London. The FTSE 100 index however tumbled 0.6 percent as oil stocks edged lower.
In the ETF space, financials-linked funds underperformed as investors’ worry over diminishing profit margins came to the forefront. Despite the bellwethers JP Morgan and Wells Fargo beating earnings estimates, the SPDR S&P Regional Banking ETF (KRE) emerged one of the worst performers for the day, tumbling 3.13 percent for the day. The State Street Financial Select Sector SPDR ETF (XLF) also tracked lower, trimming 1.37 percent for the day.
The Fed’s QE effects way have worn off, but who really were the beneficiaries of that effort other than temporary market rallies? In this week’s cartoon video, the ‘Bears’ explain in simple language who has benefitted from the bailouts and the various QE programs. Hat tip to ZeroHedge for this gem:
Our Trend Tracking Indexes (TTIs) retreated in the face of lost upward momentum, but at this point they are maintaining their position on the bullish side of the trend line:
Domestic TTI: +2.23% (last week +3.29%)
International TTI: +2.51% (last week +4.07%)
Have a great week.
Ulli…
Disclosure: No holdings
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READER Q & A FOR THE WEEK
All Reader Q & A’s are listed at our web site!
Check it out at:
Q: Ulli: I have a brokerage acct. with Fidelity holding ETF’s and some stocks. I also have some Mutual Funds as well.
With the TTI in the ‘buy’, would it be advisable to have some bonds or bond funds at this point? I do have about 30% in the Money Market and Cash Reserves.
I’m curious what you think of bonds in these “interesting” times?
A: John: Yes, I have owned a variety of bonds all year, as shown in my model portfolios.
They have balanced out market fluctuations quite well, and I consider them an important portion of any portfolio during these uncertain times. Nevertheless, I still advocate using a 5% trailing sell stop on all bond ETF holdings just in case interest rates suddenly head the other way.
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MAJOR ETF MARKET INDEXES FIZZLE; GROWTH FEARS DRAG EUROPE
US equities closed mostly lower Friday capping off their worst week in four months as worries over Europe offset early optimism over a surprise rise in consumer confidence.
Risk sentiment had improved earlier after the Michigan University/Reuters Consumer Sentiment Index jumped to a five-year high of 83.1 in October. The relief however, proved fleeting after a Labor Department report revealed the producer price index rose 1.1 percent in September, beating estimates and stoking worries of inflation. Government officials attributed the spike to a rise in energy and food prices.
Giving up a 75-point rise during the session, the Dow Jones Industrial Average (DJIA) managed to add only 2 points on the day, off 2.1 percent for the week; the blue-chip index witnessed its biggest weekly decline since June 1.
Not to be outdone, the S&P 500 Index (SPX) shed 4 points for the day, down 2.2 percent over last Friday with financials faring the worst and consumer staples pacing gains among its 10 business groups.
ETF/Mutual Fund Data updated through Thursday, October 11, 2012
If you are not familiar with some of the terminology used, please see the Glossary of Terms.
1. DOMESTIC EQUITY MUTUAL FUNDS/ETFs: BUY— since 10/25/2011
The domestic TTI broke through its long-term trend line generating a Sell for this area effective 8/9/2011. Over the recent past, we’ve seen the TTI hovering slightly below and above this dividing line between bullish and bearish territory. The clear break to the upside occurred on 10/24/11 and, effective 10/25/11, a new Buy signal for domestic equities went into effect.
As of today, our Trend Tracking Index (TTI—green line in above chart) has broken above its long term trend line (red) by +2.44%. A break back below it will generate a Sell signal to move out of all domestic equity positions. Be sure to tune into my blog for the latest updates.
US markets erased gains to end nearly flat today as early optimism over upbeat economic data faded and a slump in Apple Inc weighed on technology stocks.
Earlier, stocks rose for the first time this week and commodities rallied as risk sentiment improved following a record decline in US unemployment claims. A Labor Department report showed applications for jobless benefits declining by 30,000 last week to 339,000, the lowest since February 2008, what was later touted as an anomaly as one state may not have posted their numbers.
US trade deficit widened to $44.2 billion in August as weak demand slowed American exports to their lowest level since February, a Commerce Department report showed.
A separate report revealed import prices rose faster than expected at 1.1 percent in September while export prices rose 0.8 percent during the same period.
There has much debate if and when Spain would request for a full-fledged bailout from the European Central Bank. There’s not much clarity on the International Monetary Fund’s role in the whole process.
