[Chart courtesy of MarketWatch.com]
The fear of Eurozone frailty was priced into markets today as equities took a hit globally. The S&P 500 fell 1.68% while other global indices also took a hit. After a couple big days for commodities, gold and oil dipped down 3.00% and 3.68%, respectively. Also, the dollar stuck at $1.35/Euro.
Furthermore, the VIX remained relatively calm, rising only 2.98% but still above the 30 mark. While Greece made some strides with a vote of confidence that may momentarily temper nerves, the negative developments in Italy and Spain keep injecting more risk into global markets.
Although investors aren’t in full fledged flight to safety mode, the U.S. 10-year Treasury rate dropped to 1.94%, indicating the heightened risk in Europe that could compel international developed and emerging markets to find refuge in the U.S. We’ve been sticking with bond ETFs, and days like today certainly pay off when the market mood sours.
European bond markets struggled substantially as Spanish 10-year bonds hit 6.77% at one point due to lower demand for its bonds. It looks like Spain is following Italy’s path, edging near the 7% level. Unless Italy can get its act together, there’s a good chance of the contagion spreading to Spain.
As few options remain to cut the debt, Italian PM Monti suggested selling state assets and bringing back a property tax. Meanwhile, Italian 10-year bond yields fell below 7% due to ECB purchases. With some reports that Italy won’t get EFSF aid, Monti’s job just got a little harder.
Overall, there is discord among Eurozone members regarding the role of the ECB in helping bailout distressed countries given their level of intervention in recent bond auctions. Most notably, Germany and France are at odds with each other over the ECB’s function.
And talking about disagreement, Democrats and Republicans in the Congress Supercommittee are butting heads over a plan to reduce the overall budget deficit by $1.2 trillion over the next decade.
In U.S. economic news, there was mixed data. Although jobless benefit applications were at a 7-month low at 388,000, housing starts fell 0.3%. Real signs of improvement are simply lacking at the moment.
With the amount of political tension in Europe as well as the U.S., I find little justification to expand my equity ETF exposure. The domestic situation is currently relatively better than the international picture, but the confluence of political and economic events affecting multiple countries simultaneously justifies staying in low risk assets.
Looking at the market trends, the S&P 500, after recently coming to within striking distance of breaking through its 200-day MA to the upside, has now slipped below it by -4.41%.
While our Domestic Trend Tracking Index (TTI) remains in bullish territory by +2.06%, the international TTI has dropped deeper into bearish territory by -9.50%.
Disappointingly, one of our past core holdings, PRPFX, is nowadays more behaving like a volatile sector fund and just broke below its trend line by -1.02%.