EUFN iShares MSCI Europe Financials

Over the weekend, market participants had hoped that a strong response to the brewing Spanish crisis would stop the contagion and prevent more pain in the euro zone. European leaders provided the market with a $125 billion dollar response in order to shore up the banking sector in the beleaguered country and it appeared that stocks were going to rally as a result.

However, after the initial optimism from the pact faded, stocks sold off across the board as many felt that the proposal created more questions than it answered. Some are still wondering where the massive sum will come from while others are looking to the future, uncertain of how this will impact the upcoming Greek elections or even the brewing situation in the Italian market (see Beyond Germany Three Strong European ETFs).

Thanks to this, pretty much every European ETF was down to open up the week, although there was great variation among the various funds. By and large, investors saw better performances in securities tracking non-euro nations like the UK and Switzerland, while large caps overall held up pretty well. Yet, the same could not be said for some of the country specific ETFs that are directly impacted by the crisis (read For Europe ETFs, It Is Hard To Beat Switzerland).

In particular, the shifting sentiment was bad news for the usual suspects of the Spain ETF (EWP) and the main product tracking the region’s financial sector, the iShares MSCU Europe Financials Sector Index Fund (EUFN). These products both slumped more than most in Monday trading with the Spanish ETF trading lower by about 2.3% and EUFN declining by about 2% on the day.

Besides these ETFs, investors also saw surprisingly weak performances in the German Small Cap Market (GERJ) which was down 3.9%, the FTSE Greece 20 ETF (GREK) which lost 2.4%, but especially the main fund tracking the Italian market. This product, the iShares MSCI Italy Index Fund (EWI) was easily one of the biggest losers on the day, slumping by 4.2% in the session.

The product also traded on high levels of volume and pretty much was on a downward slope the entire session. Furthermore, investors should note that this weakness continues a rough stretch for the fund as it is now down over 20% in the past three months alone, suggesting that the focus is now shifting towards the Italian economy after this latest EU bailout (see Three European ETFs That Have Held Their Ground).

This is especially troubling as yields on 10 year Italian debt are now above the 6% level and have added more than 100 basis points since the end of March alone. This issue is further compounded by the fact that Italy has more than two trillion euros of debt and needs to sell 35 billion euros of securities every month suggesting that a crisis could be developing in this enormous economy.

Seemingly the focus is now on Italy after the Spanish bailout which isn’t good news for the policy makers in the EU as it remains to be seen if the country can even be rescued by the powers in Europe and if the citizens of the continent will even stomach more Southern European bailouts.

“The ECB will probably have to restart buying bonds but there will be a lot of sellers into that of people who are worried that Spain is the next Greece and Italy the next Spain,” said Lex Van Dam, of Hampstead Capital LLC in a Bloomberg article (see Pain In The Spain ETF Continues).

This should suggest to ETF investors that there is still a great deal of risk when it comes to investing in the PIIGS markets, above all in the case of Italy now that the country appears to be in the debt crosshairs. It also doesn’t help that in the case of EWI, close to 20% of the portfolio is tied up in banks while another quarter is in oil and gas firms.

While the banking segment has been notoriously weak as of late, the oil sector hasn’t been much better thanks to plunging crude oil prices and a lack of demand across many key markets. Thanks to this, close to half of EWI is focused on weak sectors suggesting that it could be headed for some more turmoil in the months ahead.

Overall, the large caps in the EU didn’t react too negatively to the news regarding the bailout and many, in fact, performed better than their U.S. counterparts to start the week. However, clearly the questions of the PIIGS markets haven’t been solved by the latest bailout and they have instead just shifted from Spain to Italy (read Is The Italy ETF Next?).

If the ETF market was any guide, Italy will be the next market under attack implying that investors who are focused on the region should plan accordingly and avoid—or short—Italy and EWI until a rescue package can be created for their troubled, and now in-focus, economy as well.

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ISHARS-MS EU FN (EUFN): ETF Research Reports
 
ISHARS-ITALY (EWI): ETF Research Reports
 
ISHARS-SPAIN (EWP): ETF Research Reports
 
MKT-VEC GER SC (GERJ): ETF Research Reports
 
GLBL-X/F GREC20 (GREK): ETF Research Reports
 
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