Which Way Will ETFs Go? – Markets Stuck in the Middle

[Chart courtesy of MarketWatch.com]

Despite some warnings yesterday concerning Eurozone downgrades, major market ETFs seemed relatively unaffected. The S&P 500 bumped up a paltry 0.11% as volatility remained minimal once more as the VIX rose only 1.04%.

Once again, the dollar/Euro exchange rate barely moved while commodities such as gold and oil were pretty flat. Although we haven’t seen massive daily drops lately, I wouldn’t bet against the fact that downward market pressure is likely in the coming weeks.

Ahead of the EU summit later this week, there are now talks that the Eurozone is considering some new options to boost its financial firepower. In light of difficulties to leverage the $590 billion EFSF, EU leaders are considering combining the EFSF and the ESM, the latter of which was supposed to succeed the EFSF on a long-term fund. In effect, this would double the amount of funds available. Clearly, the Eurozone realizes it’s on the cusp of financial disorder and must come up with a solution very quickly.

The barrage of downgrade speculation continues with the S&P 500 now threatening to drop the EFSF’s AAA rating if any of its country constituents providing funds loses its AAA status. Markets don’t appear receptive to some of these talks yet, but I certainly find these developments concerning and potential catalysts to badly hit domestic equity ETFs especially.

Although Greece’s Eurozone fate might be sealed, the country is still keen on reducing its budget deficit. It has pledged save $11 billion in 2012. Ireland, another PIIGS member who almost found itself in Greece’s shoes, also announced more austerity measures for 2012 as it seeks to get its finances in order.

In Washington, while Bernanke is coming to the Fed’s rescue concerning “secret loans” to banks, the Treasury’s Geithner has pledged support for Merkel’s and Sarkozy’s deficit reduction plans for the Eurozone. Seeing as the U.S. can’t come to a resolution about how to cut its deficit, hopefully Europe can do so and inspire some market confidence.

While one can only guess the extent of this apparent mini-rally, I’m still pessimistic on a long-term horizon. Nevertheless, in the short-term there are a few equity ETFs worth pursuing such as Consumer Staples Select SPDR (XLP), which we currently own. However, it’s imperative to adhere to a low risk strategy until we get clearer guidance on Europe.

About Ulli Niemann

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