Diversified exchange traded funds for Europe are barely clinging to their 50-day moving average, an important technical indicator.
Most European stock markets were in the red Wednesday while Italian bond yields traded above 7% amid reports the European Central Bank was buying debt in an effort to force yields down.
Broad European ETFs such as Vanguard Europe ETF (NYSEArca: VGK), iShares S&P Europe 350 (NYSEArca: IEV) and iShares MSCI EMU (NYSEArca: EZU) are in danger of slipping below their 50-day simple moving averages.
Investors are worried that Italian bond yields are rising to unsustainable levels, forcing another bailout or perhaps even a default. Europe’s debt crisis refuses to go away and has led to the fall of leaders in Greece and Italy already. [Italy ETF Warning Signals]
The euro is rolling over amid renewed speculation over whether the currency can even survive the crisis. CurrencyShares Euro Trust (NYSEArca: FXE) is down over 2% the past week.
Fears of a full-blown crisis in Europe have driven investors into ETFs tracking gold and U.S. Treasuries. A Eurozone breakup would be “a once-in-a-lifetime shock sowing unprecedented financial chaos,” Reuters reported Wednesday.
“You can imagine the effect of an EMU breakup on the European financial system — it would be at best paralysis, at worst collapse,” said Kieron Launder, chief investment officer at Schroders Private Banking, in the report.
“Only when the ECB pledges to buy unlimited amounts of sovereign debt will the possibility of a systematic run on Eurozone debt be put to rest,” says Morningstar analyst Samuel Lee in the firm’s November ETF Investor newsletter.
However, Germany is afraid of inflation and many Germans flinch at the thought of bailing out profligate neighbors.
“But the conventional wisdom is that they’d rather bail out the euro than not have a euro at all. Hence the rallies and the market’s belief that there probably won’t be a massive run on the sovereigns and banks,” Lee wrote. “The irony is that as the market becomes more complacent, the political will to engage in painful reform ebbs, sowing the seeds for the next cycle of panic. The final resolution of the crisis—ECB involvement—likely won’t occur without a bout of extreme market pressure.”
A momentum-based strategy is one approach to this market.
“A simple 200-day-moving-average strategy applied to a broad European exchange-traded fund like Vanguard Europe ETF would have avoided the worst of 2010 summer’s Eurozone turmoil, profited from much of the rise, and sold out before the worst of the recent drawdowns,” Lee wrote.
Vanguard Europe ETF
iShares S&P Europe 350
