By Francis Ayensu
The markets for the major European indexes all opened lower the beginning of the week. The Stoxx Europe 600, London's FTSE 100 index, Frankfurt's DAX index, and Paris’ CAC-40 index all declined as news hit the markets furthering fears of the euro debt crisis and issues around the global economy. I was set to publish an article on the looming financial markets and a possible Greek default but delayed until now. Since then, events have changed, however, as the market indexes have improved and apparently the markets have an entirely new view of the region. Hopefully you caught my sarcasm there.
The eurozone could experience another shakeup should Greece be allowed to default, which many in the bond world consider all but certain. Greece’s financial situation is currently critical and there are new doubts to its capability to meet new financial support from Germany and France, its major lending partners.
Furthering the woes to the Greek economy is a lowered economic growth estimate, forecasted to contract at 5.3% revised from an earlier decline of just 3.8%. Measures taken to subdue the problems are a two-year property tax to raise 2 billion euros by the end of the year and cuts to public spending by suspending a month’s pay of all elected public officials. Even with these measures, Greece still falls short of its targets to meet further international financial aid.
The latest news on the debt crisis indicates, contrary to earlier information, that Greece will receive another bailout and will remain in the eurozone. It looks like the leaders of EU’s two largest economies, French President Nicolas Sarkozy and German Chancellor Angela Merkel, are set to calm fears gripping investors of possible default of Greece and the consequences of such an event.
On Wednesday, Moody’s Investor Service downgraded two big French banks, Société Générale (OTC:SCGLF) and Crédit Agricole (OTCPK:CRARF), while putting another big French bank, BNP Paribas (OTC:BNOBF), on watch. This downgrade was however expected but will still raise questions about capital and increase spreads on default insurance.
As a gloomy future awaits the euro and global economic growth manages to slog forward however weakly, investors will be wise to seek protection against asset depreciation and look to capital preservation. The market is volatile to say the least and the likelihood for downward moves is higher than upward moves in the near term. With such a perspective, broad based commodities ETFs may be good investment vehicles to provide insurance and capital preservation.
The GreenHaven Continuous Commodity Index (GCC) provides broad based diversified exposure to 17 commodities and tracks the Thomson Reuters Equal Weight Continuous Commodity Total Return Index. The fund’s expense ratio of .2% is extremely low relative to the universe of funds. Its current price of $34.36 is only six percent from the 52 Week High of $36.51.
The PowerShares DB Commodity Fund (DBC) provides exposure to 14 commodities and tracks the performance of the DBIQ Optimum Yield Diversified Commodity Index Excess Return. The fund’s expense ratio of .48% is not as cheap as the GCC, but still relatively low. Its current price of $28.99 is almost ten percent off its 52 week high of $32.02.
Currency market trends could also provide return given market trends. One could take advantage of the strong U.S. dollar against the euro by being long U.S. dollar and short other currencies through the PowerShares DB USD Bull (UUP). This multi-currency ETF goes long U.S. dollar and shorts six currencies: EUR, YEN, CAD, CHF, GBP, and SEK.