Fear and Hope Driving ETF Performance
June 4th 2012 at 12:03pm by John Spence
Throw fundamentals out the window. In this volatile market, ETFs seem to be moving only on European headlines, fear and hope.
There are three primary global concerns investors can’t shake. Europe’s debt crisis is on the precipice again, China’s economy appears to be slowing, and in the U.S. investors are worried about weak employment data and the debt ceiling.
In the bond market, these worries are evident in record low yields in U.S. and German government bonds.
“Is it any wonder that the marginal investor or business would prefer to hold Treasury bonds or sit on cash? And that sort of disengagement can make economic pessimism self-fulfilling,” The Economist muses.
Friday’s dismal U.S. jobs report “helped create a degree of panic for some investors prior to the weekend, and downward revisions for previous months certainly cast a pall upon those who felt the economic engine – long in idle – was ready to roar ahead,” Emerald Asset Management said in a note Monday. [ETFs Breach 200-Day Average on Europe, Jobs]
“Additionally, rumors are beginning to swirl that the Fed will – once again – take measures to bolster the U.S. economy,” Emerald said. “Not because it wants to, but because it needs to.”
In Europe, investors continue to hope that leaders will come up with a plan to cool the debt crisis.
“To fireproof the euro zone, most everyone outside Germany thinks euro members should share responsibility for each other’s banks (via common deposit insurance) and sovereign debt (via Eurobonds). Germany has refused to countenance this,” The Economist points out.
German Chancellor Angela Merkel threw cold water on the idea of debt sharing in Europe, saying “under no circumstances” would she say yes to Eurobonds.
“The chief uncertainty surrounds the future of the euro, with Greek voters returning to the polls on June 17,” said JP Morgan Funds chief market strategist David Kelly in a weekly outlook Monday. [Greek ETF Eyes June Election]
“Added to these concerns are growing worries about the Spanish banking system. However, the basic problem is that, so far European leaders just don’t seem to get it – you cannot fix a deficit in a recession,” he wrote. “This being the case, the key question is whether Germany will be willing to halt short- term austerity for long enough to allow Europe to return to the growth path necessary for long-term fiscal solutions. Until we get this, Europe will continue to worry markets.” [ETF Performance Report: May Storms]
CurrencyShares Euro Trust (NYSEArca: FXE)
The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.