Europe’s Fragile, But Major Market ETFs Don’t Care

[Chart courtesy of MarketWatch.com]

Once again, major market ETFs ended up in the green despite continuing concerns about Europe. Although not a big day by any means as the S&P 500 only rose 0.23%, we’ve seen significantly lower levels of volatility in the market.

Without these large swings that were relatively commonplace in October and November last year, it’s certainly a better time to add some equity exposure, albeit minimal. For instance, this can be done via sector ETFs with favorable momentum figures that are less sensitive to market fluctuations.

Nevertheless, a 10-year Treasury yield below 2% and elevated yields for European bonds (i.e. Spain, Italy) serves as a stark reminder that the risk perception in the market is high. The trend of flight to safety hasn’t abated one iota.

For Greece, the time is now to cement a resolution regarding bond haircut provisions. A significant percentage of stakeholders in Greek debt, including hedge funds, seem unwilling to agree to the 50% write-down necessary to give Greece at least a shot at survival in Eurozone.

This casts serious doubt on Greece’s ability to secure an additional bailout package, increasing the likelihood of default. If it’s the case, I hope it’s an orderly default that doesn’t perturb global markets.

High demand for Spanish and Italian bonds helped drive their respective yields down in today’s auctions. Yet, there hasn’t been a sustained pattern of falling yields as borrowing costs greatly fluctuate while spreads against German bonds remain high, signaling low investor confidence.

Meanwhile, the ECB decided to keep interest rates at 1% in hopes that its recent long-term refinancing option loan program will invigorate the banking system. However, the fact that banks have been depositing a large amount of the funds rather than lending them out as much as the ECB had hoped may require the need for quantitative easing if credit markets stall further.

In the U.S., weekly jobless claims rose more than expected although we’d have to see a longer-term pattern to determine if the unemployment rate will inch back up toward 9.0%. In addition, retail sales for December weren’t as high as predicted.

So while we’ve seen some price appreciation in markets this week, I’m still compelled to err on the safe side. Surely, we aim to be proactive and add a few equity ETFs trading safely above their trend lines while keeping a solid allocation in bond ETFs in case of a sudden drop.

About Ulli Niemann

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