A generic image of a pen on paper

Cyprus Bailout: How Deep Will Europe ETF Sell-Off Go?

A generic image of a pen on paper
Shutterstock photo

Stock markets of Europe's most debt-ridden countries fronted a global sell-off Monday after a top European financial official said the Cyprus bailout could be a road map for resolving future eurozone banking problems.

But in an effort to calm the markets, Dutch Finance Minister Jeroen Dijsselbloem later issued a statement noting that Cyprus had exceptional challenges that called for taxing deposits in the country's largest banks and that "macro-economic adjustment programs are tailor-made to the situation of the country concerned and no models or templates are used."

IShares MSCI Spain ( EWP ), down 4.67%, andiShares MSCI Italy ( EWI ), off 4.06%, plunged deepest among all nonleveraged ETFs .

Vanguard MSCI Europe ETF ( VGK ), the largest ETF covering the region, fell 1.60% in heavy trade.IShares MSCI EAFE Index ( EFA ), tracking foreign developed markets, skidded 1.25%.

The European stock market will likely correct less than 10% and rally back by year's end as economic growth resumes thanks to easier year-over-year comparisons, said Alec Young, global equity strategist at S&P Capital IQ.

Europe is trading at 12.6 times this year's projected earnings, its highest in three or four years, as macro-economic data deteriorates, so a short-term pullback is in order, he said. Young projects Europe's economy will shrink 0.3% this year and grow 1% in 2014, while the rest of the world expands about 3% next year.

"A correction is overdue, given the powerful gains since last June," Bob Doll, chief equity strategist at Nuveen Asset Management, wrote in a client note. "The global economy is slowly strengthening and policymakers remain extremely accommodative," which supports equity prices.

EWP plunged to a three-month low in heavy volume Monday. It's fast approaching the key 200-day moving average, a key technical level that often provides buying support. Breaking that line would confirm a downtrend.

Its weak IBD Relative Strength Rating of 46 shows EWP has lagged more than half of the market in the past 12 months. Its Accumulation/Distribution Rating of C, on an A-to-E scale, shows institutional buying and selling are about even.

EWI closed decisively below its 200-day line for the first time since early September and at its lowest level in more than six months, confirming a downtrend Monday. Its weak RS and Acc/Dis Ratings combination of 31 and D- shows institutional investors are fleeing.

VGK fell below its short-term 50-day moving average. But it's only tumbled 5% from its 52-week high, which is considered a normal pullback in an uptrend. It carries a middle-of-the-road RS Rating of 49 and a rather weak Acc/Dis Rating of D+.

EFA also fell below its 50-day line but it's only dipped 2% from its 52-week high.

"If the panic du jour in Cyprus is resolved quickly, then stock prices should move still higher," Ed Yardeni wrote in a client note Monday. "Over the past four years, crises have been buying opportunities as crises-triggered corrections have been followed by relief rallies to new bull market highs."

Cyprus is a tiny island and although people may yank their money out of weak European banks, government bond yields and bank share prices show no signs panic thus far, he added.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Other Topics