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.
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 - Free Report) added about 2.2% on May 29.
The Japanese currency, yen, is often considered a classic safe-haven asset. And PowerShares CurrencyShares Japanese Yen ETF (FXY - Free Report) 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).
Who can deny rising volatility in equity markets? iPath S&P 500 VIX ST Futures ETN (VXX - Free Report) ,whichgives great exposure in this regard, jumped 12.1% on May 29.
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 (VNQ - Free Report) (up 0.5% on May 29) given the crisis.
Needless to say, in-focus Italy will be the hardest hit withiShares MSCI Italy Capped ETF (EWI - Free Report) diving about 5.8% on May 29.
The same was the situation of Spain withiShares MSCI Spain Capped ETF (EWP - Free Report) sliding about 5.5% on May 29.
Fears of a possible exit of Italy from the Euro zone led SPDR EURO STOXX 50 ETF (FEZ - Free Report) to lose about 4.6% in the last five days (as of May 29, 2018).
The euro slid to a 10-month low. PowerShares CcyShrs Euro ETF (FXE - Free Report) lost about 1.1% on May 29. However, investors can bet on the inverse euro ETF ProShares UltraShort Euro (EUO - Free Report) , which added about 2.2% on Tuesday.
Political risk in Europe is weighing on the British pound too, which touched a six-month low lately. PowerShares CcyShrs British PoundStlgTr (FXB - Free Report) shed about 0.5% on May 29 (read: 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 - Free Report) lost about 5.3% on May 29 while U.S. financial ETF Financial Select Sector SPDR ETF (XLF - Free Report) shed about 3.3% on the day (read: Sector ETFs & Stocks to Win or Lose on Higher Rates).
DB 3x German Bund Futures ETN BUNT 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 3.19% as bond prices dropped versus just under 2% about two weeks ago.
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