Friday ETF Roundup: XLF Plunges On European Downgrades, XLP Rises On Safe Haven Demand

by: Eric Dutram

Although stocks initially rose in Monday’s trading session on the back of a solid jobs report, markets plunged soon afterward as fears of a European crisis once again crushed investor confidence. Fitch downgraded the sovereign debt of both Italy and Spain, while some are speculating that a similar move may be in the near future for Belgium, causing many investors to speculate the crisis on the continent wasn’t contained after all. As a result of this, the Dow finished the day down .2% while the broader indexes posted more severe losses of 0.8% for the S&P 500 and 1.1% for the tech heavy Nasdaq. Commodities also experienced some degree of weakness as gold slipped by about $12/oz. but oil managed to gain on the day, finishing ahead by 30 cents a barrel.

Despite these added risks in the market thanks to Europe, traders still fled T-Bills as yields on the benchmark ten year note rose well past the 2% to finish the week yielding close to 2.08%. One of the few winners in the ETFdb 60 was the Consumer Staples Select Sector SPDR (NYSEARCA:XLP) which gained 0.6% on the day. These gains, while obviously modest, were in sharp contrast to the broader S&P 500 which sank in Friday’s session. A large reason for this was the demand for ‘safer’ corners of the equity market was surging as data was relatively strong in the U.S. but poor in Europe. This suggested to many that equities were still risky but not worth abandoning entirely, pushing investors to low beta corners of the market such as consumer staples. Thanks to this sentiment, XLP was one of the few equity winners on the day, beating out many of its other domestic counterparts [see holdings of XLP here].

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One of the many losers on the day was the Financial Select Sector SPDR (NYSEARCA:XLF) which saw its shares fall by about 3.6% in the session. Today’s losses largely came thanks to worries over more losses from the European sovereign debt crisis, especially after Fitch downgraded Spain and Italy. The ratings agency felt that both countries were more likely to default thanks to troubles in the broad euro zone and weak prospects for growth, and also put the countries on watch for further downgrades in the near future. This news hit all of the big banks hard as all of the big four were down at least 3.3% on the session. With that being said, both Morgan Stanley and Bank of America saw losses exceed 6% for the session, helping to push XLF sharply lower to end the week [see charts of XLF here].

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Disclosure: No positions at time of writing.

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