Italy is mired in a political disorder. A political alliance between two populist parties to form government
broke down after president Sergio Mattarella, a loyal supporter of the EU, debarred the nomination of Eurosceptic Paolo Savona as the economy minister. This caused the anti-establishment coalition's prime minister-elect to bow out.
Italy’s current President Mattarella has now appointed Carlo Cottarelli, a pro-austerity economist, to lead a
technocrat government. But the new appointment may not materialize as the anti-establishment Five Star Movement, the anti-immigrant League, and ex-premier Silvio Berlusconi’s Forza Italia party are opposing it.
Some parties are also mulling over an exit from the Euro zone, which is a big negative for the region. Against this scenario, a new election is likely in the country
on Jul 29 (read: Political Woes Grip European Markets: ETFs to Watch).
In addition to Italy, chances of a snap election in Spain have increased risks in the region. The biggest opposition party in Spain, the Socialists, called for a vote of confidence against prime minister Mariano Rajoy on account of an ongoing corruption case.
The chaos spread all over the global market, impacting the course of the respective bond and equity markets. Against this backdrop, some ETF areas are likely to win while some are likely to fall. Below we highlight those.
Gainers U.S. Treasury Bonds
Thanks to the sudden drive to safe-haven assets, yield on 10-year U.S. Treasury yield nosedived to 2.77% on May 29 from the month-high of 3.11%. The 10-year U.S. Treasury yield dropped the most
since the Brexit vote. Yield on 20-year Treasury declined to 2.87% from the high of 3.19% hit on May 17. iShares 20+ Year Treasury Bond ETF TLT added about 2.2% on May 29. Yen
The Japanese currency, yen, is often considered a classic safe-haven asset. And
PowerShares CurrencyShares Japanese Yen ETF FXY is set to gain if the crisis deepens. The fund was up about 0.7% on May 29 (read: Political Drama in Europe to Push Safe Haven ETFs Higher). Volatility
Who can deny rising volatility in equity markets?
iPath S&P 500 VIX ST Futures ETN ,whichgives great exposure in this regard, jumped 12.1% on May 29. VXX U.S. Small-Cap
This is the area which benefits from a sound domestic economy as the capitalization doesn’t have much exposure aboard. So, now is the time to bet on funds like
PowerShares Russell 2000 Pure Growth ETF PXSG (up 0.3% on May 29). U.S. Real Estate
Sectors that perform well on low rates will now be gainers. Real estate is such a sector. So, one can play
Vanguard Real Estate ETF (up 0.5% on May 29) given the crisis. VNQ Losers Italy
Needless to say, in-focus Italy will be the hardest hit with
iShares MSCI Italy Capped ETF diving about 5.8% on May 29. EWI Spain
The same was the situation of Spain with
iShares MSCI Spain Capped ETF sliding about 5.5% on May 29. EWP Europe
Fears of a possible exit of Italy from the Euro zone led
SPDR EURO STOXX 50 ETF to lose about 4.6% in the last five days (as of May 29, 2018). FEZ Euro
The euro slid to a 10-month low.
PowerShares CcyShrs Euro ETF FXE lost about 1.1% on May 29. However, investors can bet on the inverse euro ETF ProShares UltraShort Euro , which added about 2.2% on Tuesday. EUO Pound
Political risk in Europe is weighing on the British pound too, which touched a
six-month low lately. PowerShares CcyShrs British PoundStlgTr (shed about 0.5% on May 29 (read: FXB Quick Quote FXB - Free Report) Will Royal Wedding Truly Boost UK Economy in Q2? ETFs in Focus). Global Financial Stocks
While the stability issue in the Euro zone hit the regional financial stocks, bank stocks on the other side of the pond were also not healthy thanks to a sharp decline in U.S. Treasury bond yields.
iShares MSCI Europe Financials ETF EUFN lost about 5.3% on May 29 while U.S. financial ETF Financial Select Sector SPDR ETF XLF shed about 3.3% on the day (read: Sector ETFs & Stocks to Win or Lose on Higher Rates). Europe Bonds DB 3x German Bund Futures ETN lost about 0.5% on May 29 asbond yields staged an ascent in the Euro zone. Notably, the 10-year Italian government bond yield spiked to BUNT 3.19% as bond prices dropped versus just under 2% about two weeks ago. Want key ETF info delivered straight to your inbox?
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