The Fed, last week, held its FOMC meeting to decide on its interest rate policy. The two day meeting ended with FOMC statement release, announcing the launch of “Operation Twist” to purchase $400 billion long term treasury bonds to replace its short term treasury bonds by the same amount. The Fed further announced that it would reinvest proceeds from its maturing mortgage securities back into the mortgage market. The Fed’s outlook on the US economy is gloomy. The European debt crisis also created greater concerns last week. All these contributed to the week’s worst performance.
We look at the week ahead with great vigilance as market news points to a global recession threat. The week would be dominated by news on Europe debt crisis which has been doing so since some weeks now. Third quarter data are expected for release as the final week of the month comes to an end. US Data on housing, economic, and consumer sentiment are scheduled for release this week. German economic data and UK Gross Domestic Product data are also scheduled for release. German Bunderstag will on Thursday vote on European Financial Stability Facility (EFSF) changes which will determine to a large extent whether EU default threat members would receive further bailout. A watch out on rating downgrade should also be expected.
How likely is a global economic recession? The US government and Fed last week deployed coordinated initiatives to boost the US economy and get Americans back to work. President Obama economic plan proposes a $447 billion in tax cuts and government spending. Yet market observers and economists still see a gloomy future for the US economy as they consider these economic measures insufficient.
The stock market will definitely be on the watch out on these events. The global stock markets would be much intertwined. A bad performance of the US major stock indexes would trigger similar outcome for European and Asian market indexes. So, smart investors would be on the outlook for clues of market downturn.
Is the market likely to suffer severe losses this week? That would depend to a large extent on investors’ expectations on EU policy outcome on solving the European debt crisis. The markets will focus on news coming out of Europe this week.
What should investors do this week? Investor shouldn’t be too afraid to buy stocks. The market is more likely to be volatile. However, whatever happens in Europe, the market would show some good performance as market sentiments change.
Market sectors that investors should avoid are financials. Possible downgrading of global financial institutions is likely since Greek debt default is probable and continues to make the news. The US Treasury bond market has attracted attention lately. In fact, the Treasury bonds market recorded weekly high performance after the Fed announced that it was going to fuel the Treasury Bonds market by reinvesting proceeds from matured Treasury Bills.
Yields on the 10-year Treasury recorded a +6.61% gain while yields on the 30-year bond recorded +3.46% gain at the close of week’s trading. Perhaps, these gains are results of market rally to take advantage of the FOMC statement release. I recommend shorting directly on Treasuries and longing on ProShares Short 20+ Year Treasury (NYSEARCA:TBF), ProShares UltraShort 20+ Year Treasury (NYSEARCA:TBT).
Equity ETFs that investors should consider for exposure and diversification are SPDR S&P 500 ETF (NYSEARCA:SPY) and iShares MSCI Emerging Markets Index ETF (NYSEARCA:EEM). SPY tracks the performance of S&P 500. It has an expense ratio of 0.09 and a current dividend yield of 2.13%. EEM tracks the performance of the MSCI Emerging Market Index. It has expense ratio of 0.69% and a current dividend yield of 2.45%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.