[Chart courtesy of MarketWatch.com]
We’re back on the downside today as fears over Italy’s succession plan seemed to set in. The S&P 500 slipped 1.66%. Interestingly, European equities were relatively flat today despite the uncertainty. In commodities, oil had another big day as it shot up 2.40% to 101.75. After a few days of minimal movement, the VIX took a moderate jump, rising 7.34% to 33.51.
There’s still plenty of risk on the table that makes me wary of whether last month’s equity gains will hold by the end of this month. As the fate of Italy and Greece are still up in the air, increasing equity exposure isn’t exactly the best idea in the world at the moment.
While Italy’s 10-year yield dropped today, it was largely due to the ECB coming to the rescue to buy up their bonds to the discontent of some Eurozone members who want the ECB to be hands off in the bailout process. This semi-artificial demand so to speak masks the negative outlook on Italian debt, which isn’t under control.
As Monti officially stepped into his PM role today, hopefully the political tension will ease, but there is no guarantee that Monti’s academic background will mesh well with the typical politicians. Only time will tell if Mario Monti can step up to the task at hand and become Super Mario, helping Italy back on track and ease investor nerves.
A sign that the economy doesn’t look too hot, Fitch mentioned that major American banks are at risk of credit downgrades if the Euro situation worsens, especially because the six biggest banks in the U.S. have $50 billion in exposure to the PIIGS.
On a brighter note, unlike Europe, the U.S. reported its highest manufacturing output growth in 3 months, as industrial production rose 0.7% in September. However, this can’t make up for the persistently high unemployment and weak spending that are keeping the economy in the doldrums.
The CPI also dropped 0.1% according to the Department of Labor, so we don’t have to worry about inflation overheating any time soon. At least we can preserve our bond ETF returns in real terms for the time being.
Trading volume has remained relatively low this week in tandem with low volatility, but once we get a clearer idea of how Eurozone politicians plan to proceed with the bailout, we can see the market levers moving a lot quicker.
If that results in a big time drop, be prepared to not only have your trailing sell stop discipline in place, but also act on it when the time comes to pull the trigger.