Pop goes the market. Equity indexes soared on Thursday as investors rejoiced over Euro zone debt negotiations, with the S&P 500 gaining an impressive 3.4% for the day, while the Dow Jones Industrial Average lagged behind a bit, clinching a 2.8% gain. The bulls came charging down Wall Street after European leaders agreed to boost the region’s “rescue fund” to $1.4 trillion and managed to persuade Greek bondholders to take a 50% loss on their debt holdings. Talks of a bailout inevitably sparked inflation fears, paving the way higher for gold, with the precious metal setting near $1,740 an ounce for the day.
Investors should keep in mind that the Euro zone is not out of the woods yet by an means as several key issues remain unanswered. Policymakers still need to decide how the banks will raise the necessary capital and whether the future bank debt will be backed by a national or European guarantee [see our Euro Free Europe Portfolio]. Investor sentiment was also boosted by a positive GDP report at home, which showed a 2.5% increase in output during the third quarter of 2011, a considerable jump from the previous reading of 1.3%.
Amidst the optimism that swept over Wall Street on Thursday, the financials sector saw considerable inflows as investors rushed in to buy beaten down bank stocks on the cheap. The Financial Select Sector SPDR (XLF) was one of the biggest winners on the day, securing a gain of 5.8%. U.S. banks rallied big time thanks to evaporating concerns over Greece defaulting, which would have put considerable pressure on the already fragile banking sector. XLF remains grossly undervalued from a year-to-date perspective, seeing as how the fund is down close to 12%, while the S&P 500 is up 2% in that same time frame [see Hedge Market Exposure With The Innovative ETNs].
Given the stellar equity market performance today, it’s not much of a surprise to see the popular Barclays iPath S&P 500 VIX Short-Term Futures ETN (VXX) as one of the biggest losers on the day, down 13.3%. The VIX “Fear” Index plummeted as investor optimism sparked a strong stock market rally, prompting investors to re-allocate capital back into equities as Euro zone debt negotiations continue to progress with light at the end of the tunnel [see iShares Launches Minimum Volatility ETFs]. Momentum is on the bulls side, although investors should remain conservative seeing as how profit-taking may easily follow and erase much of today’s gains.
Disclosure: No positions at time of writing.