Reality bit hard on Friday night as the markets got a fresh dose of the pain in Spain.
After a good week for markets where hope was trumping fear, the catalyst for a new bout of pessimism was the news that the Spanish region of Valencia was to formally ask the central Spanish government in Madrid for a bailout to help service its debt. News that 5 other regions had similar intentions worried markets that the money being allocated by Europe for its troubled banking system would not be enough for the country which would have to come back for a further loan. Thus a fairly narrow bailout looks set to become something all the more complex and materially larger.
Stock markets were off sharply but it was bond markets that voted most aggressively with their feet bailing out of Spanish bonds and in doing so pushing the Spanish 10 year yields to Euro era highs at 7.27%. Shorter term Spanish bonds also were under pressure with the 2 year up 1.30% on the week to 5.75 and the 5 year note closing out the week at 6.87%. Spain also cut its growth forecast reinforcing all of the above.
Spain is clearly Europe’s almost too big to save nation but the real impact of concern about Spain and Europe is to undermine any confidence that investors might have been gaining recently. Ultimately at both a macro country or a micro company level markets are all about confidence, confidence in earnings, confidence in revenues, confidence in the economic outlook, confidence in management (government), confidence that the outlook for these things will combine to give a positive conditional probability of capital gain. If these line up money is put in the market, if not money is or should be taken of the table.
And so it was on Friday night that money was taken off the table and stocks and risk assets were sold down under pressure.
The Dow was down 120 points or 0.93% to 12,822, the S&P 500 fell 1.01% to 1,362 and the NASDAQ fell 1.37% to 2,925. Across the atlantic the FTSE was 1.09% lower but it was much worse in continental Europe where the Dax fell 1.9%, the CAC was 2.145 lower and Madrid crashed 5.83% on the back of the uptick in concerns over the future of Spain, its banking system, its regions, its debt and fiscal position and my guess is probably its stability given the high unemployment and the increased level of anti-austerity protests.
The quarterly earnings season continues this week with literally hundreds of companies reporting around the globe. The ability of companies to manage expectations about profits even with them missing revenue targets was one, if not the, primary reasons why risk assets were able to rally last week. This and the vacuum of bad news in Europe and hope that the weaknening economic outlook for the United States would bring Bernanke and his cheque book back to the table. Whether or not this sanguine outlook can be sustained again with the re-emergence of Spain’s troubles we’ll have to wait and see. But I’m willing to bet the highs for this run are now in across a host of markets.
On commodity markets, after rising for more than a week, oil prices reversed on Friday in line with other risk assets on worries about Spain and the double whammy of US Dollar strength that comes with that. But even as Nymex crude weakened into the settlement of the July contract by $1.22 bbl to $91.44 it still rose 4.98% on the week. Concerns about the Middle East remain in place and it is possible that oil holds up better than some other commodities if Friday’s weakness extends. Overall, the CRB index was only off a little because grains were up again with corn rising 2.17%, wheat up 0.87% and soybeans up 2.02%.
Over in FX land it was a tail of woe for the Euro as it was pummeled by Spanish concerns and looks to me have had its worst weekly close since early June 2012. Readers know I have a bearish bias on this one and I can’t see how its not headed under 1.20. The Australian Dollar also came under pressure as the US Dollar naturally strengthened and sits this morning around 1.0350 but it is doing much better against the European crosses. The high for this run looks in to me with 1.0307 the big support Aussie needs to hold.
Looking forward we see a busy data week here and abroad. The two key pieces of information for Australians will be the CPI for Q2 which will give a glimpse through the curtains to whether or not the RBA will have room to cut further any time soon. Last week’s NAB quarterly survey suggests they will be back regardless of the rhetoric in the Minutes last week. In the US the key data release is the advance GDP for Q2 which will give us a guesstimate to just how much slowing is coming into the US economy.
Just briefly in other news:
- News this morning of an Access Economics report saying the mining boom will be over in about 2 years and the Government is no chance to get back to surplus.
- On Sunday the German Economy minister said that Greece is unlikely to be able to fulfill its MoU commitments. Unhelpful, when will European pollies ever learn. Elsewhere in more signs of European solidarity the Bulgarian Finance Minister said that “while eastern Europe is largely implementing the necessary reforms, southern europe does almost nothing – except complain”. Helpful!
- In a largely technical comment which I wouldn’t read too much into ECB Executive Board member Benoit Coere said that negative rates are a possibility.
- Dow Jones reports that jamie Dimon the CEO of JP Morgan eats his own cooking and has stumped up $17 million of JPM stock.
- IMM futures positions sho that the market is long Aussie and US dollars and short Euro, in large, and is getting slightly long Yen.
Lets have a look at some of the markets we follow.
Crude: I noted that $93.27 was the big level that crude had to get through and if it did there was further upside. But having respected this level, crude has turned down and it looks to me like it is headed back toward $89.40/50 now to find support:
EUR/USD: The euro turned south again and is this morning below the 1.2160/90 support zone I highlighted last week. For me it appears like Euro is head under 1.20 and targeting the June 2010 low around 1.18
AUD/USD: The Aussie’s weekly close wasn’t as bad as the Euro’s but it looks like the high is in for this run as the Aussie was unable to get to 1.0465/75 nor exceed it. 1.0330/55 needs to hold on the day a break below that would see the 200 day moving average at 1.0292. There has not been a trend in the 200 day moving average for 7 or 8 months now reflecting the fact the Aussie is in a big old range.
SPI 200: Another market that looks like a top is in for this run with support at 4124 then 4095/4105 zone and below that 4080/88.
DATA: A huge week of data with CPI in Australia Wednesday and then advance GDP in the US later in the week. Today we have PPI for Australia and tonight I’ll be watching the Chicago Fed index.
Here is today’s data and you can click here for the full week’s calendar. Please note that data coloured blue is important to me and that which is coloured red is important to everyone. There is a lot a lot a lot of data this week.
And here is how the markets closed at 6.00 am Saturday Morning courtesy of AVAFX
Twitter: Greg McKenna. He is the Chief Investment Officer of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.
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