3 ETFs to Watch on Debt Deadline Day

08/02/2011 9:00 am EST

Focus: ETFS

As markets react to the US debt deal, new corporate earnings reports, and lingering Eurozone debt issues, these three ETFs, which track important corners of the markets, are likely to be heavily impacted.

The past week was a pretty poor one for markets, as a number of solid earnings reports were not enough to shake fears about the US debt problems. Republicans and Democrats remained deadlocked over how best to reign in spending and raise the ceiling ahead of the August second deadline, sending much of Wall Street into a panic in the second half of the week.

Beyond these concerns, traders also fretted about an extremely weak figure on the factory orders front and an equally gloomy report from the Fed’s Beige Book report. 

Meanwhile, in commodity markets, oil trended lower on the week as fears over demand increased, especially after the US released its GDP report, which showed growth of just 1.3% for the most recent quarter.

However, the uncertainty both in the US and Europe helped to make it another solid period for gold, as the yellow metal stayed above the $1,600/oz. level and trended towards the $1,630 mark to close out the week.

Should more debt fears plague the markets, investors could see a continuation of these trends this week, especially if a sovereign debt downgrade hits the US government in the near future.

This week, investors are likely to focus on the increasingly perilous situation in the US as the debt ceiling deadline quickly approaches. Many of the major ratings agencies have stated that if great strides are not taken to reduce deficits, the US could lose its AAA credit rating.

If this happens, it could immediately boost borrowing costs throughout the economy by as much as 60 basis points and potentially throw a wrench into some money market funds and other ultra-safe investments that are restricted to the top overall rating for their assets.

Beyond this situation, there are a few key earnings reports coming out this week that could move the markets in a number of vital industries. Quarterly updates from Pfizer (PFE), Transocean (RIG), Mastercard (MA), and Kraft Foods (KFT) are all due out this week, suggesting that while the height of earnings season may be over, we aren’t out of the woods just yet. 

With this backdrop, investors should look for the following three ETFs to have an active week:

SPDR Gold Trust (GLD)

As uncertainty continues to build over the world’s many debt crises, investors have begun to pile into alternative investments as a way to weather the storm. One of the more popular forms of protection has been gold, which has seen its price surge to a new all-time high of $1,633/oz.

Prices are currently just a few dollars away from this mark, and further turmoil in bond and currency markets could increase demand for the metal this week as well, especially if investors see more worries crop up in Europe. 

However, with that being said, investors could see a sharp drop in gold’s value if lawmakers come up with a quality plan and if the ratings agencies do not downgrade American debt. If both of these things happen, investors will likely flow back into risky assets, causing gold prices to slump in the process, potentially creating a rough week for holders of GLD.
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NEXT: 2 Other ETFs to Watch Closely Now


Guggenheim Airline ETF (FAA)

Given the rising cost of oil and the overall weakness in the economy, many investors have been staying away from one of the most volatile sectors of the economy; the airline industry. This could change this week, however, as one of the country’s largest discount carriers, Southwest Airlines (LUV), gives its quarterly report before the bell on Thursday.

The Texas-based company squeaked by with a one-cent-per-share profit for its most recent quarter, continuing the trend of weakness in the first quarter of the year for the company.

The second quarter of the year, however, tends to be more robust for the company, as in the year-ago period, LUV reported earnings per share of 15 cents.

Analysts will look for a continuation of profitability this quarter, but with the higher oil prices possibly eating into earnings, investors could see a gloomy tone being set for the rest of the industry after Southwest’s report later this week, potentially dragging down FAA as well.

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Rydex CurrencyShares Euro Currency Trust (FXE)

Although much of Europe remains in trouble thanks to high debt loads, the focus has been taken off the continent for the time being, as many are setting their sights on the American debt market instead.

However, with a resolution to the crisis coming—one way or another—investors could once again focus on the bond markets in nations such as Greece, Italy, and Spain. This could greatly harm the value of the euro when put up against the greenback, especially if yields continue to spike in large Eurozone nations such as Spain and Italy.

Furthermore, investors will look to the European Central Bank (ECB) meeting on Thursday for more clues on the central bank’s interest rate policy going forward. A recent inflation reading in the Eurozone showed that the rate of price increases dropped to 2.5%, causing some to think that this may give the bank more flexibility going forward and could prevent more rate increases in the near future.

With that being said, the 2.5% increase is still 50 basis points above the ECB target rate, so investors shouldn’t rule out another hike in the near future, making this week a potentially interesting one for currency-focused investors.

Here’s a daily chart:

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By Eric Dutram of ETFdb.com

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