Investors
returned from the Memorial Day holiday weekend to surprising political news out
of Italy that rekindled fears of a Euro crisis not seen since Greece. After a
brief sell off Tuesday, investors breathed a sigh of relief with the week
ending on a stronger than expected Jobs Report on Friday. US stocks’ resilience
continued with the markets eeking out a slight gain on large caps while the
broader Nasdaq Composite comprising a significant number of small–mid cap names,
as well as, tech companies rose significantly more.
US
indexes ended the week barely registering gains for the S&P 500 and the
NASDAQ Composite rising to 2734.62 and 7554.33 respectively for a weekly gain
of .49% and 1.62%. The indexes
recovered being led by Energy and Technology stocks.
Now
a word about why Italy matters more than Greece to the Euro….
The
Italian economy is larger than either the Greek or Spanish economy within the
Eurozone. While more industrial, rigidities in the societal and political
sectors have prevented the country from modernizing like its more innovative
neighbors. For example, the FTSE MIB Index (originally created by the Milan Stock
Exchange) has only one technology stock, STMicroelectronics with a minor 3.3%
weighting. The balance of the index is largely in banking (28%), Utilities
(17%), Energy (11%), Auto (10%) and Industrials, Insurance, etc. That’s it. One
stock is the tech sector. A cautionary
note for investors, the FTSE MIB hit its all time high in January 2000.
For
the record, MSCI Italy classifies STMicroelectronics as a French company due to
its dual country structure. Hence, Italy suffers from high unemployment
particularly among its youth. There is no tech sector to drive the economy and
create new wealth. The country runs huge government deficits to cover its
social welfare net which has been strained by the influx of African migrants.
Since
it cannot devalue its currency to become more competitive to attract
investment, the current populist coalition Trumpian-like government has come up
with a novel idea to launch a parallel internal currency called the BOT which
sent a chill thru the Eurozone. The outcome of this new crisis is likely to be
consolidation in the European Banking Sector lead by discussion of the merger
between UniCredit and SocGen as well as some type of bailout by Germans and
Dutch Governments of the weaker member states although in what form has not taken
shape if the Euro is to remain intact.
The
announcement of new tariffs on aluminum, steel and lumber on European and
Canadian imports added to investors’ concerns. Emerging Market countries like
Brazil and Argentina are starting to feel the pinch from a rising US Dollar and
increasing US interest rates as well. The
weekend China US trade discussions have been indecisive. Also, investors should maintain an eye on the
stock price of Deutsche Bank, which hit a new low, as an indicator of the
health of the European banking system. These
issues will dominate this week’s meeting of the G7.
In
fact, we thought the most insightful quote of the week was from Mohammed
El-Erian on CNBC:
"The downturn in global markets on Tuesday
over concerns about Italy's political power struggle and the possible economic
fallout as a result highlights the mistaken assumption that the world was in a
phase of synchronized growth,"… People are now realizing the only economy with real legs to
it was the U.S. economy."
Little
reported was the vote by the Federal Reserve Board of Governors to relax the
Volcker Rule that had severely limited banks from engaging in proprietary
trading. Once other agencies relax their restrictions, we should see added
liquidity to the bond markets. Also, regional banks should start expanding
lending due to reduced reporting and stress test requirements.
Given
these events, we suggest a mindful eye on tools like our Select List and Risk and
Reward Ratings that can be used to evaluate the vast set of opportunities in
the ETF marketplace. Investing in ETFs requires a new approach to macro
investing, one in which investors are just beginning to realize.
Thank
you for reading ETF Global Perspectives!
ETFG
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