In yet another volatile session, American equity markets plunged to close the trading day as fears over a French sovereign downgrade spooked market participants in Wednesday trading. The Dow fell by over 500 points yet again, wiping out yesterday’s sharp gains to finish the day below the key 11,000 mark and down 4.6%. The broader indexes also suffered significant losses in the session as the Nasdaq managed to outpace the Dow, losing 4.1%, while the S&P 500 barely squeaked by the DJIA, finishing lower by just over 50 points, or 4.4%. Meanwhile, in commodity markets, the headline products of gold and oil both gained significantly on the session; oil was up close to 3.1% on an EIA report and bargain buying, while gold surged 2.9% on continued uncertainty, briefly breaking the $1,800/oz. mark before falling to $1,793/oz. to close the day. Soft commodities also rose on the day for the most part, led by a 2% gain in both wheat and cotton, although cocoa and orange juice did fall by decent levels to round out the sector.
Currency and bond trading continued to be choppy as investors continued to digest the Fed statement from yesterday and the new worries over France. The dollar index rose by $0.8 on the day, finishing above the $74.7 mark as the currency continued to gain against the pound and the euro, putting up a nearly two cent gain against each. With that being said, the dollar did continue to fall against the yen as the Japanese currency was trading below the 77 yen/dollar level, a fresh low for the pair that highlights the extreme level of demand for safe havens across the market. Meanwhile, T-Bills continued to see massive inflows from all corners of the market as the Two-Year breached the 0.2% level while the 10 Year is now just eight basis points away from a 2.00% yield.
One of the biggest losers in the ETF world was the Vanguard European ETF (VGK) which tumbled by 7.5% on the day. Today’s heavy losses were largely the result of rumors that France would be the next AAA-rated country to lose the coveted rating, causing markets to plunge across the continent as a result. Losses were especially bad in the French banking sector as these companies already have a great deal of exposure to sovereign debt in Italy and Spain, two of the weaker EU members at this current time. Now that fears are beginning to build over French debt as well as two of the country’s southern neighbors, many are growing concerned that capital infusions or massive write-downs are right around the corner for the major French banks. “The whole issue of debt sustainability has broadened to Italy, Spain and even France. It will be something that remains a dead weight on markets for a long time,” said Mike Lenhoff, chief strategist at Brewin Dolphin. Thanks to this, traders sold-off VGK in droves, preferring to hold their equity assets in other, safer corners of the globe instead [see holdings of VGK here].
One of the biggest gainers on the day was the iPath S&P 500 VIX Short-Term Futures ETN (VXX) which surged by 12.5% in Wednesday trading. Today’s gains were largely the result of more market turmoil as traders and investors alike fled equities across the board and parked their cash in safe havens instead. With gold prices now approaching $1,800/oz. and short-term Treasury debt yielding practically nothing, demand remained high for this ETN representation of the ‘fear index’ as an alternative way to play the uncertainty. Given the ongoing questions over the European debt situation, investors should expect volatility to remain high in the near term, especially if more gloom strikes France and other major euro zone nations. With that being said, some are looking for VXX to pull back in the days ahead; the fund has gained an incredible 50% in the past five days alone [see more on VXX fact sheet here].
Disclosure: Long VGK.