Reality Finally Sets In For Major Market ETFs

[Chart courtesy of MarketWatch.com]

All the Christmas goodies have seemed to wear off as attention once again turned to the dire state of the global economy. The S&P 500 had a decent sized drop of 1.24% while European and Asian indices also headed south.

The Euro went to a new 11-month low against the dollar, falling to $1.29/Euro. Commodities also took a hit as oil dipped below $100 and gold crossed under the $1,600 mark.

Just when it looked like risk was withering away, the 10-year Treasury yield sank, ending at 1.91%. Meanwhile, the Volatility Index rose 7.30%, indicating that more volatility might be headed our way. It looks like negative 2012 expectations are finally setting in.

Italy’s 10-year bonds decreased to a yield of 6.77% after austerity measure agreements. However, this is still a very high borrowing cost that is unsustainable given Italy’s $2 trillion plus debt load. Italy has taken steps in the right direction from a fiscal perspective, but the monetary hurdles just seem too large unless some sort of debt restructuring takes place.

A delay in Greece’s early elections has prolonged the country’s uncertain fate as bankers determine how to achieve a bond haircut. I’d rather the Greeks break off from the Eurozone rather than dragging the region down, which could have nasty spillover market effects.

ECB action to provide 3-year loans to banks has injected some confidence into the banking system, which should hopefully trickle down to the real economy. Yet, I believe this will keep bond yields down in Italy and Spain among other countries for only a short while as a long-term plan remains non-existent.

In commodities, oil prices took a hit today as Iran announced that it plans on closing off the critical Strait of Hormuz. This might shake things up for a bit, but I don’t see a significant impact on markets in a broad sense.

Away from the Middle East toward the Far East, Japan’s economic troubles have yet to abate as it reported very lackluster industrial production output figures for November. With China slowing down and forecasts of economic stagnation in Japan heading into 2012, the Asian picture is quite bleak as well.

With only two days of trading before the New Year, I can’t necessarily say that the week will finish on a down note. However, I’m pretty sure that the contagion won’t be eradicated any time soon, thus justifying our primary allocation of 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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