If you're a regular reader of Money and Markets, you weren't surprised last Friday when Standard & Poor's downgraded the sovereign debt of nine European nations. I've been expecting it, as have Martin Weiss,Mike Larson and our other editors. My main question: What took them so long?
The bigger news came Monday when S&P also downgraded the European Financial Stability Facility (EFSF). EFSF is the mechanism that was supposed to save the euro zone's unstable members. Now will the rescuer itself need a rescue?
If you still have any ETF exposure in Europe, now is a good time to review your risk profile. Intermission is over and the curtain is going back up.
Another Look at BUNT
|Who rescues the rescuers from going down in flames?|
Remember November's much-trumpeted agreement to save Greece from default? It's not working out so well. Greek one-year government bonds now have an annualized yield north of 400 percent. And that's not a typo!
Such rates are absurd, of course. Bond traders obviously think default is imminent. I think they're right. The end game will probably be ejection of Greece from the euro currency union. The more interesting question is how this will impact the rest of Europe, especially Germany.
Two months ago I advised you to keep an eye on PowerShares DB 3x German Bond Futures ETN (BUNT). This is our European "canary in the coal mine."
What's BUNT telling us now? Here is an updated chart.
BUNT is holding steady but can't break higher.
The good news is that BUNT is not pointing down. That tells us traders still think Germany is credit-worthy. In fact, German bunds probably picked up some buyers following the downgrades as institutions were forced to sell debt from France and elsewhere.
The bad news: An ominous "triple top" is forming on the BUNT chart. The shares haven't been able to stay above the $30 level for long. Technically, that's a bearish sign. It means a breakdown is probably coming.
It can happen quickly, too. Last fall BUNT took only two weeks to drop from $30 down to the $26 area.
Preparing for the Inevitable
As I said, last week's actions by S&P were too little, too late. Nonetheless, the firm does have quite a bit of influence. The nine nations receiving downgrades were:
|Latest downgrades threaten the whole Continent.|
Slovakia and Slovenia are not exactly global economic heavyweights, but France is. Within the euro zone, France is second in importance only to Germany. So the loss of AAA credit status hurts.
When the U.S. also lost its AAA rating back in August, our Treasury bond market actually rose. The same thing happened in France initially. I doubt it will continue. Unlike the U.S., France does not control its own currency. Its fate is tied to the euro — and the euro is hostage to the whole Continent's political paralysis.
Should you avoid European stocks and ETFs completely? Not necessarily. But I would be very selective.
Here is a list of ETFs that focus on the countries S&P just downgraded:
- iShares MSCI France (EWQ)
- iShares MSCI Italy (EWI)
- iShares MSCI Spain (EWP)
- iShares MSCI Austria (EWO)
Although not part of the new downgrades, there is now an ETF covering Greece, the Global X FTSE Greece 20 ETF (GREK).
And here is a list of broader Europe funds that are likely to be affected:
- Vanguard MSCI Europe (VGK)
- iShares S&P Europe 350 (IEV)
- iShares MSCI EMU (EZU)
- SPDR Euro STOXX 50 ETF (FEZ)
- SPDR Emerging Europe (GUR)
We could see short-term rallies in some of these ETFs as analysts digest the latest news. I wouldn't try to trade any such rallies, though, unless you are very nimble and prepared to get out quickly.
I think there are better opportunities elsewhere, such as in Asia. And there are two ETFs that I've recently recommended to myInternational ETF Trader members. Both invest in countries with very strong growth prospects.
|< Prev||Next >|
Current Headlines - Finance
Chinese officials, investors hope new support steps will stave off stock crash
By Pete Sweeney SHANGHAI (Reuters) - China's stock markets may be facing a make-or-break week after officials rolled out an unprecedented series of steps at the weekend to prevent a full-blown stock market crash that could threaten the world's second-largest economy. An online survey by fund distributor eastmoney.com over the weekend, which polled over 100,000 individuals, said investors believed stock indexes would rise over 5 percent on Monday.
China curbs IPOs, enlists brokers in all-out bid to end market rout
By Michael Martina and Samuel Shen BEIJING/SHANGHAI (Reuters) - Beijing intensified efforts at the weekend to pull China's stock markets out of a nose-dive that is threatening the world's second-largest economy, with top brokerages pledging to buy massive amounts of shares and a report that the government has set up a market stabilisation fund. Beijing has also suspended new share offers in an attempt to take pressure off the market after a 30 percent plunge in three weeks, the Wall Street Journal said. The reported suspension of initial public offers (IPOs) came a few hours after extraordinary announcements by major brokers and fund managers, which collectively pledged to invest at least $19 billion of their own money into stocks.
Malaysia's opposition demands emergency debate on PM after graft allegations
By Praveen Menon KUALA LUMPUR (Reuters) - Two of Malaysia's main opposition parties on Sunday demanded an emergency sitting of parliament to discuss Prime Minister Najib Razak's future as tensions mounted over a report that linked him to probes into alleged corruption involving state fund 1MDB. A Wall Street Journal (WSJ) report published on Friday said that investigators had traced nearly $700 million to bank accounts they believed belonged to the prime minister. Najib denied taking any money from the debt-laden state fund or any other entity for personal gain.
MIDEAST STOCKS-Egypt halts decline as mid-caps lend support
DUBAI, July 2 (Reuters) - Bargain hunters helped Egypt's stock market arrest its seven-week slump on Sunday, though air strikes in North Sinai and Greece referendum worries limited gains. Cairo's benchmark index was little changed as mid-cap companies dominated trading volumes, with Palm Hills Development Company gaining 1.9 percent and Global Telecom up 2 percent. Shares in Emaar Misr, the Egyptian arm of Dubai real estate developer Emaar Properties, climbed by 3.94 Egyptian pounds ($0.51) on its market debut. The developer set the initial public offering (IPO) price at 3. ...
On his native turf, Pope Francis touches on cherished issues
QUITO, Ecuador (AP) — History's first Latin American pope returns to Spanish-speaking South America for the first time on Sunday, bringing a message of solidarity with the region's poor, who are expected to turn out in droves to welcome their native son home.
China arrests man for suicide "rumours" amid stock market rout - state TV
Chinese authorities have arrested a man who allegedly spread rumours about people in Beijing jumping off buildings in response to a stock market crash, state television reported on Sunday. The 29-year-old man, surnamed Tian, was detained for "disorderly behaviour", China Central Television said. The post in question could not be found on Sunday, and may have already been deleted by censors, who strictly control what can be said on Chinese social media.
A family divided: Emotions run high as Greeks vote
ATHENS, Greece (AP) — Dimitris is voting "yes" because he fears Greece would be in danger if it leaves the European Union. His daughter Alexandra is voting "no" because she is tired of richer European nations bossing Greece around.
Two dead, three missing in Louisville boat accident: reports
LOUISVILLE, Kentucky (Reuters) - Two people were killed and three were missing after a boat crashed into a bridge in downtown Louisville Saturday night.
Greece votes on high-stakes bailout referendum
Greeks started casting ballots early Sunday in the closely watched bailout referendum, with opinion polls showing people evenly split on whether to accept creditors' proposals for more austerity in exchange for rescue loans, or defiantly reject the deal.
America celebrates July 4 with hot dogs and barbecues amid tightened security
Americans marched in star-spangled parades, ran relay races, gathered for fireworks shows and crowned a new world hot dog eating champion as they celebrated Independence Day in traditional style on Saturday. Possible security threats, wildfires in the West and rainy weather on the East Coast apparently did little to dampen the spirits of celebrants decked out in red, white and blue from their headbands to their shoelaces. Crowds at Boston's Old State House erupted in applause and cannons shot out tri-color confetti after the annual July Fourth reading of the Declaration of Independence.