One is left to wonder if European Central Bank (ECB) President Mario Draghi intended to move the markets when he proclaimed that “he would do whatever it takes to save the euro.” It is somehow hard to believe that someone who serves as head of arguably the second most important central bank on the planet would not be cognizant of how his words would impact global investors in such volatile times.
What seems more likely is that Draghi, who has so far in his short tenure as ECB chief seemed to have garnered a reputation as a serious and thoughtful administrator, was running up a trial balloon to gauge response to his plan to expand the bank’s limited mandate of managing inflation and price stability. The inference was that the ECB could act to reign in the region’s spiraling bond yields.
The perception that Draghi was not just shooting from the hip with his “whatever it takes” comment was heightened by almost concurrent statements made by Germany’s Angela Merkel and France’s Francois Hollande that seemed to support the notion that the ECB had a consensus to act.
Wall Street reacted quickly to the show of optimism, as did Europe’s bourses, sending equity markets up by double digits in short order, as well as sending Spain’s 10-year bond yield down below the 7% mark, a level generally regarded as unsustainable for the Spanish economy in particular, and one that has already triggered bailout requests from Greece, Portugal, and Ireland.
The enthusiasm was short-lived, as the ECB president back-pedaled at a news conference several days later. As soon as it became clear that he was speaking in terms of a process, rather than a ready action, the markets retreated at the same rate of speed as they rose, and both Spanish and Italian bond yields increased sharply.
Draghi did toss investors some bones, outlining details of a program that would allow both Italy and Spain to seek funds via the European Financial Stability Facility (EFSF), though the conditions outlined for participation may be seen as too stringent for either country to accept.
What did become clear, however, was that the Eurozone financial powerhouse, Germany, was not yet ready to give approval for an expansion of the ECB’s current stimulus tools. The objection was not a new one, but its reemergence highlighted the difficulty that the region still has in seeking a consensus solution that would be adequate to address the region’s ongoing credit problems.
What the Periscope Sees
The degree of response by Wall Street to Draghi’s back-pedaling of his “whatever it takes” position actually might bode well for investors, at least in the short term. The fact is, the market dropped fast but recovered almost half its losses by end of the trading session following the ECB press conference. Subsequently, the markets shot up on Friday in response to positive job numbers.
The upshot is, perhaps stock prices may now reflect a high degree of “baked-in” concern, leaving some upside potential, again, at least in the short term.
For those who feel this is indeed an opportunity to “buy some of Europe” at discount prices, here are three ETFs to consider. Two are outside the Eurozone but inside the European Union, the exception, of course, being Germany.
- EWD (MSCI Sweden Index Fund) tracks the MSCI Sweden Index. It is up 11.06% year-to-date (YTD).
- EWG (MSCI Germany Index Fund) tracks the MSCI German Index. Up 7.65% YTD.
- NORW (FTSE Norway 30 ETF) tracks the FTSE Norway 30 Index. Up 10.13% YTD.
And for those who remain unconvinced that the Eurozone will ever get out of the muck, there is EWP (MSCI Spain Index Fund), which tracks the MSCI Spain Index. Down 23.39%YTD.
ETF Periscope
Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”
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