American equity markets started the week on a down note as debt fears in Europe plagued securities in Monday trading. The Dow finished the day lower by 1.2% while the S&P 500 sank by 1.8% and the Nasdaq tumbled by 2.2%, led on the downside by a 2.5% loss in Oracle and a 2% slump in shares of Cisco. In commodity markets, a stronger greenback sent many resources sharply lower although safe havens did have a solid performance led by a 0.9% gain in the gold market as the yellow metal rose to the $1,555/oz. level to start the week. Other resources were led lower by weakness in soft commodities as rice fell by 3.1% and cotton sank by 4.4%. Unsurprisingly, traders jumped into Treasury bonds given the broad weakness in equities and commodities as the Ten Year saw yields plunge below the 3.0% mark all the way to the 2.92% level while the Two Year continued its descent, falling to a yield of just 36 basis points.
One of the biggest ETF losers to start the week was the Vanguard MSCI Europe ETF (VGK) which sank by 3.7% in Monday’s session. Today’s losses were largely the result of more worry over Italy and their debt load and how the massive economy would reign in the deficit. Many analysts believe that the political will is not there to enact further austerity measures and most agree that the current size of the European bailout package is not sufficient to help Italy, further adding to the concerns of bond holders. As a result, two year Italian government debt saw yields spike by over 60 basis points at one point in the day while ten year bonds saw yields rise by close to 33 basis points in comparison. “The danger is that the problems are gathering momentum,” said Frances Hudson, global thematic strategist with Standard Life Investments in Edinburgh, Scotland. “Italy’s economic challenges are real because they are very indebted.” Thanks to these concerns, investors sold-off European securities across the board pushing down the fund over 6.1% in the past week alone [see charts of VGK here].
One of the biggest ETF winners on the day was the iPath S&P 500 VIX Short-Term Futures ETN (VXX) which soared by 8.2% to open up the week. Today’s gains in the ETN representation of the ‘fear index’ came thanks to not only more worries over Italian debt, but over Greece’s crisis as well. The latest plans for Greece from leaders in Brussels suggested that Athens should be allowed to default on some of its debt as part of a new bailout package. A possible new plan also calls for lowering interest rates on bailout loans, as well as supranational organizations buying back bonds on the open market. “The basic goal is to reduce the debt burden of Greece both through actions of the private sector and the public sector,” said one senior European official involved in negotiations. Thanks to this uncertainty as well as the looming issue of the Italian debt problem, VXX soared in today’s session, helping to reverse the longer term trend of the fund, at least for the time being [see more fundamentals of VXX here].