Spain and Italy were at the forefront of a global sell-off yet
again Thursday after the European Central Bank disappointed the
market by not enacting new measures to deal with the debt
IShares MSCI Spain Index (
) plunged 6%, while
MSCI Italy Index (
) dropped 4%. Both ETFs hit overhead price resistance at their
50-day moving averages, which is very bearish. They resumed a
long-term downtrend after staging a countertrend rally last week.
The rally began after ECB President Mario Draghi's pledge that he
would do "whatever it takes" to save the euro.
Draghi said the European Financial Stability Facility (EFSF),
European Stability Mechanism (ESM) and ECB may start buying
Spanish and Italian bonds to bring down exorbitant interest
rates. Spanish 10-year bond yields rose 0.43 percentage points to
7.17%, according to Bloomberg data.
"Draghi's comments in London meant that the Bank won't protect
the eurozone right now. Instead the ECB will avert disaster only
when the euro looks like it is under severe attack," Kathleen
Brooks, an analyst at Forex.com, wrote in a research note.
"Since central banks hold the key to whether markets rally or
sell off, the lack of ECB action at Thursday's meeting could be
self-fulfilling. If it causes investors to panic and Spanish and
Italian bond yields to rise sharply, it may eventually force the
ECB to reactivate its bond buying program sooner rather than
For the EFSF to buy a country's debt, the country must
officially apply for a bailout and follow a plan set by the
European Union and International Monetary Fund to restore their
financial health. But the indebted countries don't want to give
up control or their independence. Previous austerity measures
sparked massive public protests.
The ECB will eventually have to buy Spain and Italy's
sovereign debt, giving private-sector bond holders a chance to
sell their holdings, says David Kotok, chairman and chief
investment officer at Sarasota, Fla.-based Cumberland Advisors.
But transferring the debts from one party to another will add no
productivity to the shrinking economies and continue to weaken
their debt structure.
"These economies are imposing additional and increasing costs
that only exacerbate the downward spiral," Kotok wrote in a
Political efforts to ease monetary policy have led to "ever
more reckless fiscal policies, as evidenced by ever-rising fiscal
debts," says Ed Yardeni, president of Yardeni research. "Could it
be that government is the problem rather than the solution? I
think so," he wrote in his daily briefing.
The ECB left its key interest rate unchanged at 0.75%. The
euro fell against the dollar as investors fled risk assets for
safe havens in German bunds and the U.S. dollar, amplifying
losses for U.S. investors in foreign markets.CurrencyShares Euro
) fell 0.33%.
PowerShares DB U.S.
Dollar Index Bullish (
), which tracks the greenback against a basket of foreign
currencies, gained 0.17%.
IShares MSCI EAFE Index (
), tracking developed foreign markets, fell 1.82%.IShares MSCI
Emerging Markets Index (EEM) skidded 1.71%.
On the domestic front, the
SPDR S&P 500
(SPY) dropped 0.68% to 136.66.
"The market continues to grind sideways and until we see a
breakout either above 1390 ($139 for SPY) or a breakdown below
1330 ($133 for SPY), there is no good trade setup for
conservative traders," Chad Karnes, chief market strategist at
ETFGuide.com, wrote in a client note.
If the S&P 500 fails to break above 1420 ($142 for SPY),
it may mark the end of the bull market that began in March 2009,
says Brian Carruthers, a market technician and founder of Brian
Carruthers & Associates in Laguna Beach, Calif.
"If the market was a baseball game, we are most likely in the
ninth inning of a cyclical bull market," said Carruthers. "I feel
we are topping now, and certainly between now and the end of the
year a new bear market will begin. The next bear market,
unfortunately, will likely be more painful, than the previous
SPDR Dow Jones Industrial Average (DIA) lost 0.73%.PowerShares
QQQ (QQQ), a basket of the 100 largest nonfinancial stocks on the
Nasdaq, gave back 0.36%.
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