Still No Clear Direction For ETFs

[Chart courtesy of MarketWatch.com]

Once again, major market ETFs didn’t move much as the S&P 500 gained 0.29%. But European indices fell once more while the Euro dropped to $1.28/Euro, its lowest level in 15 months.

While markets may not be fully incorporating European uncertainty at the moment, the weak Euro clearly indicates European concern among investors.

Although the VIX is relatively low just above 20, it’s no time to regain a risk appetite and move heavily into equity ETFs with the exception of a very select few. Volatility surely hasn’t faded away.

Widening European bond spreads also show continued financial strain in the region. Italy’s 10-year yield rose above the unsustainable 7% level to 7.07% while Spain’s 10-year yield went up to 5.59%. As borrowing costs remain high, confidence has greatly eroded. One thing’s for sure – I have little confidence that Europe can find a long-term solution without significant outside intervention.

In further signs of frailty amongst the PIIGS, the EFSF had to raise over $4 billion in funds to help Ireland and Portugal. Outside of the Eurozone, Hungary is falling into decline with worries that it might default this year based on its recent disappointing debt auctions. As Greece’s end is in sight, others are unfortunately starting to follow the same path.

Meanwhile, France’s bond auction today revealed persistent negative market sentiment. Not only was demand lower, but borrowing costs increased. Contagion has entered the European core and won’t be leaving any time soon.

Italy’s fortune isn’t getting any better as its unemployment rate edged up. Although nowhere near as dismal as Spain, it reveals the economic stagnation that Italy will have to endure in the years ahead in order to reduce its debt load.

An increase in U.S. payrolls is a promising sign ahead of tomorrow’s jobs figures although small businesses suffered a dip in employment in December. In the end, the unemployment rate will be the ultimate determinant of where the labor market is right now.

Known for having a high savings rate, China has finally come to realize that it needs to boost domestic consumption if it wishes to maintain strong growth. This is necessary for a more effective, self-sufficient global economy where countries don’t resort to currency wars to propel growth through exports.

Amidst the multitude of factors impacting ETFs, I’m especially looking forward to Friday’s unemployment numbers to see how markets respond. Until then, nothing’s going to change as far as our portfolio outlook is concerned.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
This entry was posted in Market Review and tagged . Bookmark the permalink.