Equity ETFs Swing Up Again, But Europe’s On the Rocks

[Chart courtesy of MarketWatch.com]

The S&P 500 rose 1.07% after yesterday’s losses despite prevalent signs of weakness in Europe.

The Euro was essentially unchanged at $1.30/Euro while the U.S. 10-year Treasury yielded 1.90%. Also, gold hit its lowest mark in 6 months as the dollar has strengthened.

In U.S. economic data, existing home sales rose in November while there was greater business activity, but jobless claims rose slightly more than expected. However, I don’t see signs of a full stage recovery yet.

There needs to be a long-term trend of housing and employment improvement before we see the economy turn around. And as of now, the emergence of any positive trend remains to be seen.

The Fed announced that U.S. credit markets have tightened over the last 3 months. With banks afraid of Europe transmitting its liquidity shortfall over to the U.S. despite ECB action, this certainly won’t bode well for the U.S. economy if lending is stymied.

Italy’s bond markets continue to be in topsy turvy form. Not only did they sell fewer bonds than expected, but the 10-year bond yield rose to 6.98%, just a tad under the unsustainable 7% mark.

With Italy having to auction off roughly $570 billion in debt next year with these types of yields, I simply can’t fathom how Italy will afford to pay the interest. Italian PM Mario Monti certainly has his hands full.

And the situation in Greece keeps getting worse. Recent data show that through November, income tax revenue is 9.3% lower than last year. So much for efforts to reduce tax evasion especially at a time when money is leaving the country and the income base is shrinking due to high unemployment.

In other parts of Eastern Europe, Hungary had to cancel its 3-year bond auction as the country’s risk profile has greatly turned off investors. The IMF has already stated that it will refuse to offer aid until Hungary institutes strict economic reforms.

Another indication that investors are flocking toward lower risk assets, the U.K. 10-year bond hit a record low yield of 1.96%. While not immune to the Eurozone’s issues, the fact that the U.K. is outside the Eurozone does make it slightly more attractive.

While markets appeared to go up today on perceived optimistic economic data, the fundamentals don’t justify it. A lack of investor confidence still lingers while banks in Europe and beyond are ailing. Thus, I can’t stray too far from the sidelines, sticking to bond/sector ETFs and cash.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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