The Eurozone’s woes weighed on markets in Asia yesterday and this weakness accelerated to the downside as European markets opened late in our day. Spanish bonds hit new Euro era highs across the curve with the 2 year note coming under intense pressure and the 10 year closing at 7.50% in European trade. At this level markets are saying and thinking that this is unsustainable and the spectre of a wider Spanish bailout is now growing. Indeed another region said it needs help and reports are that of the €18 billion the Spanish government had set aside for the regions there were now claims in the mid 20 billion Euro region – you do the math. All the while it seems that the pressure on Greece and possibility of its exit are growing as well.
Spanish 2nd quarter GDP was released by the Central Bank and showed a fall of 0.4% on the quarter for a 1% annual fall. There was a “substantial contraction in public and private spending” the Central bank said and in these 7 words are the troubles of the global economy writ large. We all understand that in much of the developed world too much debt was built up and that the debt overhang must now either be defaulted on or worked through over a generation. But austerity at a governmental level simultaneous with household retrenchment is counterproductive.
Herein lies the big risk to stocks and risk assets – companies can get as lean as they like and report earnings on falling revenues but in the end if public and private spending is in the doldrums. There is disappointment ahead for both earnings and revenues and for investors who seem scared of missing the next big leg higher. Indeed in the FT this morning there is a piece titled “Blue-Chips raise recession fears” its worth a look.
What all the debt and sovereign and household austerity means is that this GFC still has a long way to run and markets for risk assets face some serious challenges in the months and years ahead. I had a look at the disconnect between the data and outlook and the actual price action in this week’s Macro Investor. If you haven’t signed up or taken a free trial I would suggest having a look.
So, at the close for Stocks, the Dow was down 100 points or 0.9% to 12,721, the S&P 500 dropped the same percentage to close at 1,350 and the NASDAQ fell 1.3% to 2,887. Stocks found support and were off the lows with quite a bit of short covering or bargain hunting. European bourses were under intense pressure from the get go and closed sharpply lower across the board. There were short selling bans instituted in Spain and Italy but while this did help their markets recover from intense pressure it simply highlights the troubled road ahead. So while Madrid closed down just 1.01% the FTSE closed down 2.09%, the DAX a more substantial 3.18% and the CAC fell 2.89%.
On commodity markets, Nymex crude fell another 3% and made a low below $88 Bbl before rallying back to the $89 region where it met heavy selling, closing in the low $88 range for a fall of 3.52%. Of the 16 commodities I watch only cattle and cocoa were higher. Even the grains were down and substantially so with corn off 1.3%, Wheat 3.34% and Soybeans 3.95%. Gold was off a little – watch $1559 as an indicator for a substantial break lower.
The pain in Spain gave FX Markets plenty of action with the Euro hitting new two year lows, the US Dollar up across the board except against the Yen. The Pound got poll-axed and the Aussie Dollar was under pressure but held up better than most. The low in the Euro was 1.2069 and the recovery has it back near its highs for the night sitting at 1.2137 as I write. The Yen was strong enough to sneak under 78.00 and the Aussie got down below 1.0250 and has actually trailed the Euro’s recovery with the EUR/AUD rate now a full cent above the low of 1.1702. Looks like the bottom might be in for the EUR/AUD cross for a little while – perhaps time for a bounce toward 1.21.
Just briefly in other news:
- Moody’s has just released the news that it now has The Netherlands and Germany on negative watch.
- Syria has admitted that it has chemical weapons – watch this space.
- Unsurprisingly the Eurozone consumer confidence numbers released last night showed a fall to -21.6 from -19.8 last month. Interestingly, and I didn’t know this, Dow Jones reports that the average back to 1990 is -12.8. What an optimistic bunch they are.
- News overnight that the ECB stayed out of government bond markets again last week – I think we can see that in the price action.
- The Chicago Fed index of industrial production edged slightly higher in June to -0.15 from -0.48 in May. The 3 month average improved from -0.38 to -0.20. Consumption and housing edged higher as well but were both still in negative territory.
Lets have a look at some of the markets we follow.
Crude: Yesterday I said that crude “looks to me like it is headed back toward $89.40/50 now to find support” but it crashed through here then found this level resistance on the bounce. As you can see, below the recent uptrend has broken and first Fibonacci support comes in at $87.12 which must hold if crude isn’t turning substantially lower.
EUR/USD: Longer term I remain of the view that the Euro is heading under 1.20 and targeting the June 2010 low around 1.18. But shorter term the 4 hour charts look like they have had an OK bounce and a move back toward 1.2159 perhaps 1.22 is in the offing.
AUD/USD: The AUD slipped through support at 1.0330/55 and then the 200 day moving average at 1.0292 in the past 24 hours. If it slips back through the current 1.0250/60 region then it looks biased back toward 1.01. Probably not on the day though given the way the 4 hour charts look.
SPI 200: Broke through all supports but has bounced nicely with the recovery of US stocks overnight. Maybe a recovery back toward 4100 maybe even 4120 before reversing.
DATA: What a next 24 hours for data. In Australia we’ll hear Glenn Steven’s annual Anika Foundation speech and we’ll all be watching the Chinese data around lunchtime with the release the release of the Leading Index and HSBC Flash PMI. Tonight we have PMI data for Europe and the US as well as the Richmond 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.
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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