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Which ETFs Could Suffer from Latest Euro-Zone Downgrades?
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Posted on 01/19/2012, 11:15
By Ron Rowland
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.
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
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| 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.
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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.
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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.
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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:
- France
- Italy
- Spain
- Portugal
- Austria
- Cyprus
- Malta
- Slovakia
- Slovenia
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| 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)
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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 my International ETF Trader members. Both invest in countries with very strong growth prospects.
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Best wishes,
Ron
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