Why Greece, Spain and Italy ETFs Are Rallying

Michelle Remo, “Big 4″ observer
September 12, 2012 /

Major U.S. and European stock ETFs — especially the most indebted ones — rallied to new highs Tuesdays ahead of a slew of highly anticipated, market-moving events this week.

These include the key German court ruling on the legality of the European bailout fund and the Dutch election Wednesday. Then there’s the possibility of more stimulus from the Federal Reserve at week’s end.

Global X FTSE Greece 20 ETF ( GREK ), up 4%, hit a five-month high after a seven-day winning streak.

IShares MSCI Spain Index ( EWP ), up 2%, reached its highest level since early April. Its IBD Accumulation/Distribution Rating has improved to a strong B from a low D+ in the past two months. That shows institutional investors are buying more shares than selling.

IShares MSCI Italy Index ( EWI ), up 2%, also touched a five-month high and has a strong B Acc-Dis Rating.
The world’s most indebted countries are rallying from a relief that the European debt crisis hasn’t played out like the 2008 Lehman Bros. debacle, thanks to coordinated central bank intervention from the U.S. Europe and China, says Michael Gayed, chief investment strategist at Pension Partners in New York with $150 million in assets under management.

“Markets acted with 100% certainty of a 2008 repeat,” he said. “The risk (now) is to not take the risk. The risk is to bet against reflation when intermarket trends are all screaming that inflation expectations are back, which is bad for bonds, and great for stocks.”

IShares MSCI EAFE Index ( EFA ), tracking developed foreign markets, climbed 1%. IShares MSCI Emerging Markets Index ( EEM ), also rose 1%.

Strength in the euro against the greenback helped boost returns for investments denominated in dollars.CurrencyShares Euro Trust (FXE), tracking the 17-nation currency against the dollar, climbed 0.8% to a four-month apex. PowerShares DB U.S. Dollar Index Bullish (UUP), measuring the greenback against a basket of foreign currencies, plunged 0.7% to a new four-month low on expectations that the Federal Reserve will announce more quantitative easing when it meets Thursday and Friday.

“The market is expecting $600 billion in new printed money on Thursday and anything less will be met with severe disappointment,” said Jeff Sica, founder of SICA Wealth Management in Morristown, N.J. “The head games the central bank has been playing with the psychology of investors will backfire once investors realize the truth; which is the central bank has no ability to save the economy by printing more money.”

While the Fed can’t help the economic problems brought on by the European recession and the looming fiscal cliff, market strategists believe more quantitative easing is likely because of the high unemployment rate reported last week.

“There may be diminished marginal returns from doing more easing,” Joseph Kalish, chief global macro strategist at Ned Davis Research, wrote in a report. But “the Fed may feel obligated to act in order to fulfill its mandate.”

U.S. job openings slipped to 3.66 million in July vs. 3.72 million in June, the Labor Department reported Tuesday. But job openings climbed 9% from the year-ago period.

U.S. Markets Mixed

On the home front, SPDR S&P 500 (SPY) rose 0.3% to just a hair below its 2008 high. PowerShares QQQ (QQQ), tracking the 100 largest nonfinancial stocks on the Nasdaq, slipped 0.07%. SPDR Dow Jones Industrial Average (DIA), up 0.5%, touched its highest level since December 2007.

The U.S. trade deficit grew by 0.2% in July to a seasonally adjusted level of $42 billion, the Commerce Department reported. The trade gap with China rose more than 7% to its highest dollar amount ever. Overall, the gap was not as big as expected.

“The report suggests that exports are starting to weaken, although the statistical impact on gross domestic product will probably be neutralized by relatively weak imports as well,” Jim O’Sullivan, chief U.S. economist at High Frequency Economics, wrote.


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