Equity markets finished a rough quarter yesterday, as most major indexes fell back sharply after surging higher to start the year. The quarter was especially difficult for Europe and in particular the PIGS of Portugal, Italy, Greece, and Spain. In fact, the worst performing ETF in the Europe Equities ETFdb Category is the iShares MSCI Spain Index Fund (EWP), which has fallen by 33.5% since the beginning of the year. The fund looks to break out of the doldrums heading into the third quarter, but with two key reports have many investors suspecting that no good news will be forthcoming for the foreseeable future. Luckily for Spain, the country has continued to have an impressive performance at the World Cup; otherwise it would be an extremely long and bleak summer for the heavily indebted Spaniards [also see World Cup Of ETFs: Plays On All 32 Countries].
The first piece of bad news came as Moody’s put Spain’s Aaa credit rating on review for a possible downgrade due to “flagging economic prospects, challenging fiscal targets and rising funding costs,” which threatens to sink the country further into an economic malaise. Moody’s is also predicting that it will take a long time for the country to overcome its real estate bust and budget cuts, with some at the firm expecting Spanish GDP growth to average less than 1% from now until 2014 at the earliest. While this review of credit ratings will not be completed for months, it certainly puts investors on edge and refocuses the eye of the sovereign debt storm on the Iberian peninsula for the third quarter.
Additionally, and arguably the most important story in Europe today, is the end of a one year bank-lending program totaling more than half a trillion dollars that was designed to ensure adequate liquidity among private banks and to encourage lending. The ECB has said it will provide funds for three months at an interest rate of 1% on Wednesday, and it will carry out a special six-day-loan operation on Thursday. However, the maturity level will be drastically shortened, which may cause banks to look elsewhere for funds if they can find banks willing to lend to them [also read Warning: Five Country ETFs Heavily Focused On Financials].
Due to the uncertainty of these two issues, Thursday’s ETF to watch is the Spanish equity fund EWP. This ETF, which tracks the MSCI Spain Index, looks to be heavily impacted by financial news, since more than 40% of assets go towards banks and other financial institutions. In fact, two of its top three holdings, Banco Santander and Banco Bilbao Vizcaya Argentaria SA, combine to make up just over 29% of total assets. EWP be in for a volatile day if the euro zone’s plan to ween the European banks off of the one-year loans does not go as smoothly as planned [also read Is The Spain ETF (EWP) Doomed?].
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Disclosure: No positions at time of writing.