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
Live: Day 2 of the Boston Marathon bombing trial
Mistrial in Jodi Arias case
Embattled Hillary Clinton urges State Department to release emails
By Steve Holland WASHINGTON (Reuters) - U.S. Democrat Hillary Clinton on Wednesday broke her silence over a budding controversy involving her use of personal email for work when she was secretary of state, saying she wanted the U.S. State Department to release them swiftly. Clinton's statement was aimed at cooling a political firestorm over allegations that she inappropriately used her personal email for work while secretary of state from 2009 to 2013. The State Department said it will review the emails provided by Clinton "using a normal process that guides such releases." "We will undertake this review as quickly as possible. Clinton's tweeted statement came hours after a congressional committee investigating the Sept. 11, 2012, attack on a U.S. diplomatic facility in Benghazi, Libya, issued subpoenas for her emails.
Delta plane slides off runway at New York's LaGuardia Airport
By Laila Kearney NEW YORK (Reuters) - A Delta Air Lines jetliner with 125 passengers and five crew members aboard slid off the runway at New York's LaGuardia Airport on Thursday during a snowstorm, but there were no reported serious injuries, officials said. Delta Flight 1086 was landing at LaGuardia after a morning flight from Atlanta, the airline said. Images from local media showed the Delta plane on a snowy runway area with its nose smashed into a fence. Multiple emergency rescue crews are on the scene, and the National Transportation Safety Board is on its way to LaGuardia, one of three main airports serving the New York metropolitan area, according to its operator, the Port Authority of New York and New Jersey.
Global Markets - Euro hits 11 1/2-year low, bonds rise after ECB
By Richard Leong NEW YORK (Reuters) - The euro fell to an 11 1/2-year low against the dollar as U.S. and euro zone bond prices rose on Thursday, after the European Central Bank spelled out its 1 trillion-euro stimulus plan that begins next Monday. Wall Street and European stock prices were supported by the ECB's latest effort to jumpstart the struggling euro zone economy, which has been a drag on global growth. ECB President Mario Draghi outlined the central bank's quantitative easing program at a press conference following a scheduled policy meeting. "Mr Draghi is showing that the ECB is determined to continue until it gets the results it needs.
Senate Democrats step up pressure for vote on attorney general
By Lindsay Dunsmuir WASHINGTON (Reuters) - Senate Democrats on Thursday wrote a formal letter to Republicans urging them to hold a vote to confirm Loretta Lynch as the next U.S. attorney general. There is still no date set by the Republican majority for a vote to be held on the Senate floor for Lynch's nomination, despite the Senate judiciary committee's endorsing her a week ago. The letter, circulated by Democratic Senators Chuck Schumer and Patrick Leahy, urged the Republicans to schedule a floor vote as soon as possible.
Wall Street little changed after 2-day drop, data
By Chuck Mikolajczak NEW YORK (Reuters) - U.S. stocks were little changed on Thursday, in the wake of two days of declines on the S&P 500, as economic data did little to alter expectations on the timing of an interest rate hike by the Federal Reserve. Initial jobless claims rose to 320,000 in the latest week, above the 295,000 estimate and 313,000 in the prior week.
TSX higher as banks and resource stocks lead; earnings lift
By Solarina Ho TORONTO (Reuters) - Canada's main stock exchange rose broadly on Thursday, led by healthy gains among bank shares and forecast-beating results from Canadian Natural Resources Ltd , the country's No. 2 oil and gas producer. The TSX moved in tandem with global stocks, which were supported by the European Central Bank's latest effort to boost the struggling eurozone economy. "The main driver is one, no surprises out of Europe," said Irwin Michael, portfolio manager at ABC Funds. "The banks are moving a little bit and certain stocks are picking up on either decent earnings, share buybacks or dividend increases." The heavily weighted financial stocks were the most influential, gaining 0.4 percent.
MOVES-UBS, HSBC, Mercer, Credit Suisse, F&C Investments
(Adds Credit Suisse, F&C Investments) March 5 (Reuters) - The following financial servicesindustry appointments were announced on Thursday. To inform usof other job changes, email email@example.com. UBS GROUP AG The Switzerland-based financial services provider has hireda team of three executives for its U.S. consumer and retailinvestment banking unit from boutique investment bank EvercorePartners Inc, the Wall Street Journal reported, citingan internal memo it saw. ...
Carrefour lifts capital spend to cement turnaround
By Dominique Vidalon PARIS (Reuters) - Carrefour SA, the world's second-largest retailer, reported higher profits on Thursday as a revival of its European hypermarkets started to pay off and said it would lift capital spending further this year to cement that recovery. The group also reiterated it would be ready to go ahead this year with a stock market flotation in Brazil, its second-largest market after France, if market conditions allow. Carrefour, which ranks second globally to Wal-Mart Stores Inc, said 2014 operating profit rose 6.7 percent to 2.39 billion euros ($2.6 billion), in line with a Thomson Reuters I/B/E/S poll average of 2.38 billion. The performance reflected improved profitability at its core French and European businesses and robust growth in Brazil.