SCOREBOARD: Spanish spin cycle

Spain's bailout request was well anticipated, but that didn't stop markets bleaching as the news became tangible.

If it looks like there was nothing much driving the downward moves on the stock market last night and, well, that’s because there wasn’t. Nothing major at least. Cyprus requested a bailout, as the deal they were working on with the Russians fell through and so they’ve had to formally request aid – €2-3 billion. Spain also put their request in, but no amount was announced. None of these events were unexpected by the way, but, and as I mentioned yesterday, it was enough that the actual announcement effect could cause havoc, despite being well flagged – and not needed in the case of Spain.

That certainly looks to be the case and coupled with news that the Greek finance minister resigned, markets were in a spin. Yields on the Spanish 10-year shot up 25bps to 6.58 per cent and the Italian 10-year wasn’t too far behind – it was up almost the same amount to 5.997 per cent. I should mention that the new Greek finance minister resigned because of ill health rather than any new dysfunction. Whatever the case, as ‘club med’ yields rose, equities fell and hard. In Europe, the Dax was down 2.1 per cent, the CaC was off 2.2 per cent and the FTSE was down 1.1 per cent. The news in Europe otherwise was about countries that breach debt rules having their budgets rewritten by the EU or being fined. That's not a new proposal but it is apparently going to be discussed at the upcoming EU summit, according to the press.

Over on Wall Street, even surprisingly positive data couldn’t turn the tide. Probably because it was fairly minor, but hey, it’s not like it was a clash of the titans on the news front last night. So new home sales were stronger than expected, rising 7.6 per cent in May to 369,000. In level terms that is still very low, but look at the momentum! Sales are now at a 2-year high. Then, bucking the global manufacturing data of late, the Dallas Fed manufacturing activity index spiked to 5.8 from -5. So we saw data suggesting both a housing and a manufacturing boom. That's laughable perhaps, but just as credible as relying on those PMIs we saw last week to suggest global growth momentum is slowing further. In any case, the point is that the US data was better than expected but still couldn’t stymie the offer, which was put on from the open. Stocks just bounced around in red territory after that, without much excitement, and at the bell the S&P500 was off 1.6 per cent (1313), the Dow had fallen 1.1 per cent (12502), the Nasdaq was 1.9 per cent lower (2836) and our own SPI was off another 0.8 per cent to 3963.

Now for the confusing bit. Commodities, outside of crude, rose. Crude followed the trend on other markets and sold off a bit, down 0.7 per cent in New York trading to be at $79.2. But in terms of the metals, silver rose over 3 per cent, copper was 0.7 per cent higher and some of the softs shot higher – corn for instance was over 7 per cent higher. There were a number of things at work here. On the gold front, option expiry is moving things and then for corn, there is some serious concern about the current US crop at the same time as Russia just downgraded its grain crop forecast by 10 per cent. These are big moves.

It was otherwise a simple session for both the forex and debt markets. US treasuries rallied again, the 10-year yield down 4bps to 1.6 per cent, the 5-year was off a couple of basis points to 0.71 per cent while the 2-year sits at 0.2998 per cent. As for Aussie futures, the 3s and the 10s rose 4 ticks to 97.69 and 97.04 respectively. Then for forex, the Australian dollar is hovering just above parity at 1.001, down smalls from yesterday afternoon. The euro is then at $1.2506, virtually unchanged, while sterling is at $1.5575 and the yen sits at $79.65.

There wasn’t much else out last night in regards to data and the only other thing we should watch is Turkey. If you haven’t seen it in the press, Syria shot down one of their planes and Turkey is suggesting yesterday that the incident won’t go unpunished – especially as they now accuse Syria of firing on the search and rescue team that tried to find the plane.

There’s only a bit more data due tonight. In our session we see comments from a Reserve Bank assistant governor as a panel discussant (1350 AEST), and then this afternoon all we see are German import prices. German consumer prices follow tonight, and as for the US data, this includes durable goods orders (May) and pending home sales.

Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

Follow @AdamCarrEcon on Twitter.

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