Stocks, ETFs Plunge as Italian Bonds Top 7%

If you had any hopes that Europe would get its act together and come up with a reasonable plan to deal with its debt crisis, I think it’s time to give the points to the cynics.

Italian bond yields spiked to 7.25% today on fears that Italy has replaced Greece as the next flash point in the European debt crisis. People were hoping Italy would be able to institute some austerity measures if Italian Prime Minister Silvio Berlusconi stepped down. However, news that Berlusconi had pledged to resign, and his insistence on elections instead of an interim government, instead sent markets reeling.

With Italian bonds hitting an all-time high since the euro’s 1999 introduction, they reached the same level that forced Greece, Ireland and Portugal to seek bailouts. This sent U.S. stocks plunging. The S&P 500 Index tumbled 47 points, or 3.7% to 1229.

The evaporation of investor confidence was clear by the movement of ETFs that track the Italian bond and equity markets. The PowerShares DB Italian Treasury Bond Futures ETN (ITLY) fell 3% to a new low of $17.38 and the PowerShares DB 3x Italian Treasury Bond Futures ETN (ITLT) sank 10.3% to $12.37. These ETNs measure the performance of a long position in Euro-BTP futures, whose underlying assets are Italian government debt with an original term of no longer than 16 years. The ITLT ETN provides leveraged exposure three times greater than the unleveraged bonds. They have expense ratios of 0.5% and 0.95% respectively. If you’re looking for a good way to short the Italian bond market, these offer a good proxy. Just be aware, the ETNs are unsecured debt notes subjected to Deutsche Bank’s credit risk.

After months of failed plans, it’s become apparent that the European politicians are unable to make the hard choices to avert a disaster and that this has all been a huge shell game to push the problem forward without actually doing anything. I think it’s time for people to get out of U.S. stocks. We’re in for another hard landing.

Other ways to take advantage of the clustercuss that I fear will soon envelope Europe are the iShares MSCI Italy Index Fund (EWI), which tracks about 85% of the Italian equity market, and the CurrencyShares Euro Trust (FXE), which offers U.S. investors a way to bet on the euro without trading on the foreign exchange markets. The MSCI Italy fund, which charges 0.54%, plummeted 9.4% to $12.30, while the Euro Trust, which charges 0.4%, fell 2% to $135.03.

With Berlusconi demanding new elections, he effectively leaves Italy leaderless at the depths of the crisis, bringing the country close to a breaking point.

Meanwhile, late Wednesday, Greek Prime Minister George Papandreou did officially quit, without naming a successor.

It’s hard to see things getting better soon. The market’s recent bounce gave most people an opportunity to get out of the market with some profits. I think it’s a good time to go to cash.

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One response to “Stocks, ETFs Plunge as Italian Bonds Top 7%

  1. Pingback: It’s Not the Heat; It’s the Liquidity |

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