Markets took a dip today given continued Eurozone uncertainty and less than stellar data. The S&P 500 retreated 0.95% while other major indices across the global echoed a similar negative sentiment.
The dollar appreciated against the Euro to $1.36/Euro while commodities had a mild drop. Volatility slightly edged up 3.63%, but overall market volume was quite low for the day, so we’ll have to see how the risk picture transpires over the course of the week.
Today’s telling figure was a 2% reduction in Eurozone industrial production for the month of September. This was the biggest drop in nearly 2 years ago, an indication that Europe’s real economy outside of debt issues is hitting a major roadblock. The compounding of economic weakness and financial breakdown could accelerate the likelihood of a worldwide recession.
Italy’s difficulties continue as its recent auction of 3 billion Euros in 5-year bonds yielded a record high 6.29%. With Berlusconi out and Mario Monti in, one can only hope Italy can have some sort of political cohesion to come up with a debt solution. Investor confidence in Italy is non-existent, and with Italy’s borrowing costs showing no signs of falling, the possibility of a haircut á la Greece will become increasingly likely.
Despite Italy’s woes, Merkel is adamant about establishing political unity to put the Eurozone back on the straight and narrow. However, this is much easier said than done. Now is not the time for idealism when the fate of the Eurozone is at the hands of clumsy PIIGS. Ensuring calmer markets, restoring financial stability, and avoiding a global economic slowdown are of paramount importance in my opinion. For an up to date assessment of the EU situation and the recent market rally, please read Zerohedge’s article on the subject.
As far as the U.S. is concerned, San Francisco Fed economists released a report arguing that the probability of a U.S. recession in early 2012 is over 50%, attributed to the mounting problems in the Eurozone. To put it plainly, there’s a greater chance of the contagion spreading to the U.S.
As European developments play out this week, hopefully I will have a better idea as to where to add any additional equity exposure if need be. In the meantime, I want to maintain a low risk profile, especially as the technical trends don’t support jumping into equity ETFs with both feet. My mantra continues to be to limit downside exposure with our strict sell stop strategy.
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