SCOREBOARD: China bull meets Spanish bear
China drove the good news with trade, production and car sale figures up but Spain's bailout confirmed investor fears.
Then there was Spain. Events there have been especially interesting. Having consistently denied that a bailout was required – noting that the amounts required to recapitalise banks were not onerous (which they weren’t), Spain comes out over the weekend and says they will accept European aid.
Enormous pressure had been applied to Spain to accept a bailout which at face value was to calm markets. But when you look at how the market has actually reacted you have to wonder what it is exactly these people are up to. The move has had the opposite effect in the end and, in particular, Spanish bond yields shot higher – the 10-year yield now gives you 6.47 per cent, which is up some 40 basis points overnight. Italian yields are also higher and the 10-year is up roughly 35 basis points to 5.83 per cent. Not entirely unpredictable, all things considered, because moves like this, especially when they are not actually required, only serve to justify the fear. I mean, they could have continued a program of full or partial nationalisations, or simply taken toxic assets off balance sheet – as pretty much everyone else has done. But they didn’t, and ‘bailouts’ only reinforce the irrational suspicion that Spain has huge, insurmountable problems.
Certainly they have problems, but when you look at the maths – public and private sector balance sheets (both sides of the ledger, not just the debts) you realise the idea they are insurmountable is completely false. This is the main reason why Spain has had no problem selling its debt (and no, it isn’t the ECB buying it). The fear now of course is what happens in the case of a default, which the logic goes; Spain must be much closer to if they are accepting aid. Maybe they’ll be convinced to do that too, who knows. For what’s it’s, worth and as a condition of aid, Spain’s banks must submit to scrutiny by European officials.
Euro did not fare well at all, losing about two big figures in overnight trading to end at 1.2487, although equities ended (having initially been bid) mixed – Dax up 0.2 per cent, the CaC down 0.3 per cent and the FTSE off 0.05 per cent.
Over on Wall Street, the mood was worse and the main indexes were down 1.3 per cent on the S&P (1308), the Dow lost 1.1 per cent (12411), while the Nasdaq fell 1.7 per cent (2809). All sectors took a hit, but the worst performers appear to have been tech and financial stocks. Crude too was belted, with WTI off about $4 to $81.5 although commodities elsewhere were mixed, with copper and gold ($1597) little changed. Otherwise, the Australian dollar is off almost a figure to 0.9864, sterling sits at 1.5481 and yen at 79.42.
Finally for the price action, US treasuries rallied and the 10-year yield fell 4 basis points or so to 1.59 per cent, the 5-year fell a bit over 2 basis points to 0.68 per cent, while the 2-year was little changed at 0.27 per cent.
Not much else out really so looking at the day ahead, we get NAB’s business confidence figures at 1130 AEST: The data is for May so we won’t have the benefit of last week’s data. Tonight, it’s worth watching out for UK industrial production and US import prices. Fed board member Daniel K. Tarullo also gives a speech.
Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.
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