This week started on a down note as investors once again reassessed the likelihood of a European contagion, pushing equities broadly lower in the process. The Dow finished the day lower by about 2.1% while the broader benchmarks turned in slightly better performances as the tech heavy Nasdaq fell by about 2.0% in comparison while the S&P 500 slumped by 1.9%. Losses were pretty widespread on the day but the heaviest declines seemed to be in the financial, and basic materials sectors while some in the services and utilities space managed to hold their ground in Monday trading. Commodities also saw some degree of weakness as the headliners of gold and oil both fell slightly on the day. Most of the other resources trended lower on the session with energy products leading the way on the downside, closely followed by the riskiest of soft commodities as well as industrial metals. Wheat, corn, and the livestock space were some of the few winners on the day, suggesting that it wasn’t all bad for the asset class to open up the week.
Currency trading, on the other hand, saw the U.S. dollar finally gain when compared to its major counterparts of the world, especially against the euro. The euro fell about 1.2 cents against the dollar in today’s trading while the pound also weakened slightly on the day. The yen, however, did manage to strengthen, pushing that currency below the 78 mark to open up the week. Thanks in large part to the broad market uncertainty, T-Bills did see some inflows on the day. The 10 year see yields fall to just 2.17% while the two year was more stable, adding one basis point and finishing at 0.27%.
One of the biggest ETF winners on the day was the iPath S&P 500 VIX Short-Term Futures ETN (VXX) which surged by 10.4% in Monday trading. Today’s large gains were thanks to comments from German officials who tried to temper expectations regarding an expanded EFSF, bank recapitalizations, and a swift resolution to the debt crisis. “The chancellor has pointed out that dreams building up that this package will mean everything will be solved and over by Monday cannot be fulfilled,” the spokesman for Angela Merkel, Steffen Seibert, told reporters, according to Reuters. Thanks to this, some are now unsure if the response from the large European nations will be enough to stave off default and prevent a contagion from spreading across the continent’s weaker members. Unsurprisingly, many investors bolted to the ETN representation of the ‘fear index’ as a response, helping to push the fund to one of its best one day performances in recent memory [see fundamentals of VXX here].
One of the biggest losers in the ETFdb 60 was the iShares MSCI Brazil Index Fund (EWZ) which sank by 3.9% to start the week. Today’s sharp loss came as economists once again boosted their 2012 inflation target for the nation, up to 5.61%. This marks the seventh straight week that expectations have climbed, and comes at a terrible time for the nation, as speculation is building that interest rates will be cut in the near future. “Inflation dynamics are getting worse,” said Flavio Serrano, senior economist at Espirito Santo Investment Bank in Sao Paulo. “The labor market has been driving this situation. We see the unemployment rate below its natural level and, despite that, the central bank is cutting interest rates.” Given the still rising inflation and the high possibility of lower rates, many investors are beginning to rethink the central bank’s commitment to keeping prices stable, causing many investors to sell off shares in Brazilian firms across the board [see holdings of EWZ here].
Disclosure: Long EWZ.