Will Euro Woes Rain On The Bull’s Parade?

by on February 6, 2012 | ETFs Mentioned:

Equity markets soared to multi-month highs last week as investors digested encouraging economic data on the home front coupled with positive corporate performance surprises. Wall Street ended the week on a high note after the unemployment rate fell to 8.3%, paving the way for the bulls before Superbowl weekend. Looking forward, with earnings seasons dwindling down to its final releases, investors will need to once again consider the situation in Europe. Greek debt woes have resurfaced early this week as lawmakers overseas continue to struggle to reach a bailout agreement. With no major economic data releases at home this week, investors will likely have to shift their attention back to the debt burdened currency bloc, whether they like it or not.

Weekly Outlook

The coming week will be filled with central bank meetings and key inflation data releases. Below, we highlight ETFs that may see an increase in trading activity as relevant market data is released and evaluated by investors:

  • CurrencyShares Australian Dollar Trust (FXA): This ETF could gap on Tuesday morning if the Aussie dollar stages a violent reaction to the latest Reserve Bank of Australia rate decision due later today. Analysts are expecting for the current 4.25% rate to be tightened down to 4%.
  • iShares FTSE China 25 Index Fund (FXI): Chinese equity markets may come under pressure on Thursday if the latest consumer price index release shows a worrisome slowdown in economic growth. Analysts are expecting for inflation to come in at 4%, versus the previous reading of 4.1%. 
  • CurrencyShares British Pound Sterling Trust (FXB): The Bank of England is expected to release its decision regarding interest rates early Thursday morning, which could lead to volatile trading in both currency and equity markets. FXB may experience an increase in trading volumes depending on how investors interpret the bank’s most recent economic commentary. Analysts are expecting for the interest rate to remain unchanged at 0.5%. 
  • iShares MSCI EMU Index Fund (EZU): Soon after the Bank of England decision will follow the European Central Bank meeting. Investors will pay close attention to the economic outlook issued after the rate decision itself. Analysts are expecting for policymakers to hold the rate steady at 1%.
  • Van Eck Market Vectors Germany Small-Cap ETF (GERJ): The spotlight will remain fixed over Europe on Friday as well given the German consumer price index release. Equity markets in the European powerhouse will likely take cues from the latest inflation data; analysts are expecting for German CPI to come in unchanged at 2.3%.
  • SPDR S&P Retail ETF (XRT): The main economic release from the U.S. this week will be consumer sentiment, which is expected to come in at 75.5, versus the previous reading of 75. Stocks in the retail sector could experience an increase in trading volumes as investors digest what the latest sentiment data could mean for spending.

The bulls have staged quite a run on Wall Street over the past month, although many technical indicators are signaling that markets are floating higher and higher into overbought territory, perhaps suggesting that a healthy pullback may occur in the foreseeable future. With earnings euphoria simmering down at home, investors may need to once again reassess the developments overseas, and judging by the lack of significant progress in debt negotiations, the reaction may translate into profit-taking. Below, we have highlighted three technical trading ideas for the upcoming week. Note that most of these recommendations require active management as they are only relevant for a very short period of time. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit taking techniques.

Actionable ETF Idea #1: Long FCG

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Disclosure: No positions at time of writing.