Major Market ETFs Seem To Forget About Europe

[Chart courtesy of MarketWatch.com]

Despite continuing concerns surrounding Europe, the S&P 500 rose 0.89% while European and Asian indices also posted large gains. Meanwhile, the 10-year Treasury yield went up as did commodity prices.

However, the Euro moved very little against the dollar, sticking to $1.28/Euro. The trend of record high deposits at the ECB despite new liquidity measures highlights the frailty of the financial system, which can’t be ignored.

Yesterday, I mentioned that it might be an appropriate time to gain some equity exposure especially with minimized volatility. Given some of the upward momentum, as the S&P 500 is above its long-term moving average, taking on equity ETFs very selectively can reap some benefits. Yet, the level of uncertainty that exists in markets serves a reminder that a big drop can happen at any time.

After Germany issued negative interest rates for its debt, the UK has now followed suit. Alarmingly, the UK issued 35-year bonds at a rate of -0.12%. The system is surely broken when investors are willing to pay a fee to preserve their capital. If this apparent flight to safety isn’t a danger sign, then I don’t know what is.

Bad news bears continue for the PIIGS. Italy’s 10-year bond has now climbed to 7.17%, making Italy’s debt load increasingly unsustainable. And amid talks of economic stagnation due to austerity measures, Portugal announced it expected a GDP contraction over 3%.

Ireland is also in a tight spot after comments from Citi’s chief economist that the country may have to restructure its bailout deal and possibly Greek style bond haircuts.  Having a deficit that is over 31% of GDP (see data summary in this link), the worst in Europe, surely doesn’t help.

In Eastern Europe, Hungary is facing a tipping point hinging on whether or not it will get a sufficient IMF loan. The future looks bleak when 3-month bonds are going for 7.98%. With this plethora of negativity, it boggles my mind how markets can go up.

Amidst the tense housing situation in the U.S., the Fannie Mae CEO stepped down. Hopefully a change in leadership can bring some much needed help to the ailing residential market that has left the economy in a lull.

Interestingly, this past November represented the biggest increase in consumer borrowing in 10 years. I’m skeptical this means there will be a steady rise in consumption though. Hopefully Americans aren’t going back to their generally non-saving tendencies as evidenced before the crisis.

While it’s difficult to deny that January has started off pretty well, all the news is indicating otherwise. Regardless, I am still bracing for a rude awakening through a limited risk ETF strategy.

About Ulli Niemann

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