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
Witnesses: Some buildings collapse in Nepal capital after 7.7 quake
By Gopal Sharma and Ross Adkin KATHMANDU (Reuters) - A powerful earthquake struck Nepal and sent tremors through northern India on Saturday, killing more than 1,300 people, touching off a deadly avalanche on Mount Everest and toppling a 19th-century tower in the capital Kathmandu. There were reports of devastation in outlying, isolated mountainous areas after the midday quake of magnitude 7.9, Nepal's worst in 81 years, centered 50 miles (80 km) east of the second city, Pokhara. India was first to respond by sending in military aircraft with medical equipment and relief teams. A police spokesman said the death toll in Nepal alone had reached 1,341, about half of them in the Kathmandu Valley.
Hey, that's my cappuccino! Coyote captured outside lower Manhattan cafe
Police captured a young, female coyote outside a cafe in a residential area of lower Manhattan on Saturday, the latest in a series of coyote sightings in New York City, where an increasing number of the predators are making their home. An emergency operator fielded a 911 call early Saturday morning reporting a coyote sighting at North Cove Marina near Battery Park City, said Detective Annette Markowski, spokeswoman for the New York Police Department. It was placed in a cage and transported in a police cruiser to Manhattan Animal Care and Control for examination. "It is healthy and will be released into an appropriate wilderness area somewhere in New York City, probably today," said a spokesman for the New York City Department of Parks and Recreation.
10 dead as quake and avalanche sweep Mount Everest region
KATHMANDU, Nepal (AP) — An avalanche triggered by a massive earthquake swept across Nepal's Mount Everest region on Saturday, killing at least 10 climbers and guides, slamming into a section of the mountaineering base camp, and leaving an unknown number of people injured and missing, officials said.
Day of protests planned in Baltimore after black man's death
By Lacey Johnson BALTIMORE (Reuters) - Waves of demonstrators were expected to descend on Baltimore on Saturday to protest the unexplained death of a black man after he was taken into custody, a day after the city's police chief said officers had failed to give him timely medical attention for a spinal injury. Both were due to start at the place where Freddie Gray, 25, was detained on April 12 for carrying a switchblade knife and placed inside a police transport van.
Nepal quake: Over 1,000 dead, history razed, Everest shaken
Factbox - Deutsche Bank's puzzle pieces for restructuring
Deutsche Bank faces a tough task as it aims to pare its investment banking, dump its Postbank retail chain and slash costs in a restructuring plan designed to restore profitability. POSTBANK RETAIL NETWORK The ubiquitous retail chain serves 14 million clients from 1,100 branches integrated into the postal system. Deutsche bought Postbank for around 6 billion euros ($6.5 billion) in steps starting in 2008 and now holds 94 percent of the firm. Deutsche wants to cut its stake to below 50 percent, and trade union Verdi has said the sale will take place on the stock market.
U.S. regulator says 'flash crash' manipulation hard to detect
By Suzanne Barlyn CHICAGO (Reuters) - The type of alleged market manipulation by the British trader accused of helping provoke the "flash crash" in 2010 is hard to detect, the chief of the Financial Industry Regulatory Authority said on Friday. Nonetheless, the alleged abuses were "somewhat surprising" given that his behavior was identified in 2009 but continued for another five years, said Richard Ketchum, chairman and chief executive of FINRA, a self-funded regulator for Wall Street. "I won't second guess what happened at the MERC without understanding the facts themselves," said Ketchum, referring to the Chicago Mercantile Exchange, the market that Navinder Singh Sarao has been accused of manipulating from his home outside London.
Deutsche Bank to split off Postbank via stock market - trade union
FRANKFURT (Reuters) - German trade union Verdi on Friday said that Deutsche Bank management has chosen to split off its Postbank division via the stock market. "The management board of Deutsche Bank chose the model where Postbank will be split off through a stock market flotation," Verdi said in a statement following an official Deutsche announcement about its new strategy. (Reporting by Thomas Atkins; Editing by Maria Sheahan)
Insight - Flash crash charges garner increasing skepticism in high-speed world
By Douwe Miedema WASHINGTON (Reuters) - The notion that one man trading from his parents' house in a working class London suburb had a material role in the 2010 Wall Street flash crash has aroused increasing skepticism from investors and traders since charges were brought on Tuesday. The U.S. has asked UK authorities to hand over Navinder Singh Sarao, 36, after his arrest this week on charges that he manipulated markets over several years in a fraudulent scheme that helped cause the stock market rout. The U.S. Department of Justice alleges that Sarao used souped-up, off-the-shelf software to trick other market participants into thinking massive sell orders were about to hit, causing the so-called E-mini S&P futures prices to drop so he could buy at cheaper levels. The charges against Sarao, operating far from the centre of U.S. markets and engaging in activity some believe occurs every day among larger firms, show that regulators may not shy away from publicity, even if their case may be legally solid. Linking Sarao to the flash crash "smacks of sensationalism," said Manoj Narang, founder of Tradeworx, a firm that supplies data for regulators.
Flash crash charges garner increasing skepticism in high-speed world
The U.S. has asked UK authorities to hand over Navinder Singh Sarao, 36, after his arrest this week on charges that he manipulated markets over several years in a fraudulent scheme that helped cause the stock market rout. The U.S. Department of Justice alleges that Sarao used souped-up, off-the-shelf software to trick other market participants into thinking massive sell orders were about to hit, causing the so-called E-mini S&P futures prices to drop so he could buy at cheaper levels. Linking Sarao to the flash crash "smacks of sensationalism," said Manoj Narang, founder of Tradeworx, a firm that supplies data for regulators. So far, at least 194 people have signed up to an online message saying "One man with a single broadband connection cannot bring down an entire market." Sarao, who court documents show pushed around millions of dollars between banks in the Caribbean, Switzerland and the Middle East, has been granted bail in London on conditions including a 5 million-pound ($7.5 million) bond. His lawyer, Joel Smith, declined to comment on whether Sarao had yet raised the bail and been released, but said he opposes extradition to the United States. CANCEL IF CLOSE The view held by some in the market that Sarao is a scapegoat for the flash crash may not help his case much.