European fears gripped the market again last night and it was risk off in a big way. Pick your bogeyman. A poll showed that anti-reform parties gained the lead in Greece, scary if not for the fact they themselves have said they don’t want to leave the eurozone under any circumstances. Then Spanish bond yields are pushing higher again and last night hit a high yield of 6.7 per cent (new euro era high) on the 10-year before settling to 6.65 per cent – up about 15 basis points from yesterday. As we all know by now, surging bond yields bring about their own crisis, but there are some important points to remember.
At the moment Spain is not at any serious threat of default or collapse. The government has funded just over half, I think, of their funding needs for the year and have, as we know, one of the lowest debt to GDP ratios around. It wasn’t too long ago, a month or so, that markets were gobbling up Spanish debt for the yield. Have the fundamentals really changed so much in such a short period? No, of course not, I suspect we’re just witnessing a Pavlov effect. Remember that Spain has a $1.5 trillion economy making theirs one of the world’s biggest. Throwing in 30, 50 or even $100 billion to recapitalise their banks can be done easily without sending the public debt to GDP to unserviceable levels. But the hysteria feeds itself and the sky, she is falling!
Stocks were smashed around the globe – in Spain we're talking 2.6 per cent, but the major indices weren’t too far behind. The Dax was off 1.8 per cent, the CaC down 2.2 per cent and the FTSE 1.7 per cent lower. Over in the US, the offer was on from the open and at the bell we saw the S&P500 down 1.4 per cent (1313) with all sectors being hit. Energy and basic materials were the hardest hit within that though (down almost 3 per cent and 2.3 per cent respectively), on the back of some huge falls in the commodity space.
Check it out – crude was off 3.7 per cent in NY ($87.3) which is the lowest level since the last outbreak of hysteria six months ago. Copper too fell hard, 2.3 per cent. Some of that move is the fear trade and gold rose $15 ($1563) on the back of those safehaven flows. Some of it has to do with an apparent oil glut – stories around that US stockpiles are at their highest since 1990 – but there is also a currency element. The US dollar index for example rose 0.6 per cent and we saw big falls in euro – off a big figure to 1.2370. The Australian dollar followed suit and is at 0.9708 (lowest since late last year) while sterling is 140 pips lower (1.5484) and yen is at 79.07 from 79.34. Otherwise for stocks, the Dow was off 1.3 per cent (12419), the Nasdaq fell 1.25 per cent (2837) and the SPI was 1.1 per cent lower (4043).
About the only thing that pushed higher were bonds – new record lows for gilts (1.64 per cent on the 10-year), bunds (1.26 per cent), etc. It’s a global phenomenon, which ironically makes all this debt everyone is so concerned about much, much easier to service. Unless you’re Spain or Italy that is, and despite the immense wealth of both countries. But there you go. It makes me wonder whether anyone bothers to do research anymore. As for US treasury yields they rallied hard – because they’re safe – the 10-year yield is at 1.62 per cent or about 12 basis points lower from yesterday afternoon and about 80 basis points lower from a 2012 peak in March. The 5-year is down seven basis points to 0.68 per cent and the 2-year is down about two basis points to 0.26 per cent.
Not really much else to tell you, I’m afraid. Pending home sales in the US fell about 5.5 per cent which at the margin would have added that flight to ‘quality’ and then we saw US mortgage applications fall about 1.3 per cent in the week to May 25. In Europe, the business climate indicator fell to -0.77 in May from -0.51 (the average is -0.01).
To the day ahead, we get industrial production figures out of South Korea and Japan this morning at 0900 and 0950 AEST respectively. Australian data follows soon after with capex, building approvals and credit numbers all out at 1130. This afternoon we see German retail sales figures and unemployment data, while tonight the key US data is the second estimate of first quarter GDP (1.9 per cent expected), the ADP employment report and the jobless claims data.
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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