[Chart courtesy of MarketWatch.com]
Markets were acting bullish once again with the S&P 500 gaining 0.49%. Some of the gains were likely attributed to positive earnings reports from financial institutions among others, and expectations that Greece might come to an agreement with bondholders. European and Asian markets rose as well.
An indication that investors don’t seem to be worried about Europe, the 10-year Treasury jumped up to a yield of 1.97%. Also, the Euro has risen back up to a level of $1.30/Euro, further echoing that sentiment.
In general, markets seem to be ignoring the recent European sovereign debt downgrades. Leading up to the crisis, investors placed their faith in optimistic ratings agency analyses that proved to be inaccurate. But now that ratings agencies are highlighting major Eurozone problems, investors don’t seem to care. However, I strongly believe the writing’s on the wall for Europe, and it’s not pretty.
Italy’s issues continue as its banks reached out to the ECB for nearly $65 billion, highlighting the continued stress in the banking system. The bottom line is that European banks lack the capital necessary to be self-sufficient without significant outside help. Hopefully the ECB’s 3-year loan facility to assist ailing banks works out in the end.
However, France and Spain had bond auctions today resulting in lower yields, offering some respite after last week’s downgrades. Nevertheless, we can’t forget that Spain has a high budget deficit compounded by an unemployment rate in excess of 23% that’s putting major financial strain on the country.
ECB President Mario Draghi came out today and said that he foresees a better 2012 for the Eurozone with the ECB’s liquidity boosting efforts and austerity measures. I can’t say I necessarily agree given projections that Eurozone GDP will fall while the European financial system remains highly anemic. A long-term solution is still not in place given the inadequacy of the EFSF and the IMF’s realization that it will need to intervene more.
In the U.S., jobless claims are at their lowest since 2008. This is some positive news, but a prolonged decrease in the unemployment rate would offer better evidence of economic improvement.
As markets continue to exhibit a little irrational exuberance, there’s certainly an opportunity to take advantage of this apparent short-term blip by adding a couple equity ETF names. But I’m still hesitant long-term, justifying my overall low risk positions.