The S&P 500 reached an intraday high of 1,380 on Thursday. Friday the market dropped 13 points. This morning S&P 500 futures are down 13 points. What happened to flip the markets so quickly? (1) Spain announced Friday their recession would last until 2013, (2) Bond yields are spiking again Monday after reports stated as many as six Spanish regions will ask the central government for assistance, (3) comments out of Germany over the weekend brought a Greek default back into the picture, and (4) Europe changed the rules again, undermining market confidence for the countless time; from the Washington Post:
Recall that in June, E.U. officials agreed (and announced) to lend money directly to Spain’s troubled banks. At the time, observers thought that the entire euro zone would use its financial might to prop up Spain’s banks. The already-squeezed Spanish government wouldn’t have to bear the burden alone. Europe would become more like the United States in that respect (recall that, after the U.S. housing bubble burst, Florida didn’t have to rescue its troubled banks all by itself). That announcement seemed to reassure the markets. Well, fast forward a month. The bailout package has just been approved by the rest of Europe. But Germany’s politicians have thrown a kink in the plan. The German Bundestag voted Thursday to approve the $122 billion banking bailout, but only if the Spanish government accepted full liability for the loans. “There will be no direct bank financing,” said Volker Kauder, head of the Christian Democratic delegation in the Bundestag. While Spain does get some help, it’s a sign that wealthier countries like Germany are only willing to do so much. Instead of edging closer to a full union, the euro zone remains a collection of very different countries awkwardly hitched together.
As stated in Sunday’s video, even if the markets stabilize later in the year, the door remains open for the S&P 500 to take out the recent low of 1,278, which is 84 points below Friday’s close of 1,362. Given the rapidly deteriorating situation in Europe, we are looking at hedging options to reduce downside risk in our portfolios. We have a Fed statement coming in seven trading days, which could flip the markets back to “risk on”.