Equity markets sank on Tuesday after Greece and Portugal saw their debt sharply downgraded by ratings firm Standard & Poors. The ratings agency pushed Greece’s debt down to junk status and lowered Portugal two levels from A+ to A- with a negative outlook. “The patience of the markets is starting to run out to get a solid Greece bailout in place,” said Mike Zuzolo, president of Global Commodity Analytics and Consulting. Also on Tuesday, commodities fell across the board, with oil sliding by more than $2. This broad weakness led to safe haven buying, which increased the demand for Treasury securities; the yield on the 10 year note fell below 3.7% and gold which gained $10 in Tuesday trading.
The ETFdb 60 Index, a benchmark measuring the performance of asset classes available through exchange-traded products, slid 17.82 points, or 1.7%, one of its biggest single session losses on the year. The ETFdb 60 is now up 2.4% in 2010.
The biggest loser in the ETFdb 60 was (JJC), which sank by just over 5% in Tuesday trading. Continued weakness in Europe drove down the demand for this base metal as investors feared that the situation would spread across the euro zone. This news, combined with a stronger dollar and weakness in China, the world’s top copper consumer, to caused a rough ride for copper. The weakness in China has largely been attributed to the country’s plan to reel in real estate inflation in order to prevent a bubble from forming, thus limiting demand for the housing critical metal (see how charts of JJC’s recent performance).
The biggest gainer on the day was iPath S&P 500 VIX Short-Term Futures ETN (VXX), which surged higher by 9.9%. This came after the debt downgrades brought a new wave of fear back to the markets. Greece’s debt fell to a rating level on par with countries such as Azerbaijan, Colombia, Egypt, Panama and Romania. Furthermore, a report out of the Bank of Greece forecasts that debt will rise to a level of 130% by 2014, increasing the possibility that the country may be forced to declare bankruptcy unless it is able to obtain help from richer and larger euro members such as Germany. VXX continues to exhibit a correlation with equity markets close to -1.0, further establishing its status as one of the most effective diversifiers and forms of portfolio insurance out there (see technical analysis of VXX here).
Disclosure: No positions at time of writing.