Spain over the weekend just about completes the PIIGS bailout, "S" for Spain and as noted the biggest domino in the chain, the one that the EU simply can't afford (Italy is yet to waddle up to the trough). Ironically though, when these countries are seen to be begging at the Troika's feet, it is the countries themselves that are in trouble that typically hold the trump cards. Sure the Troika has imposed harsh austerity measures and even more draconian measures or at least tried. In the end, Spain seems to have won, at least for the time being as the Eurozone agreed on Friday to lend Spain up to $100 bn Euros, this was the exact figure we suspected.
From Reuters:
Euro zone finance ministers agreed on Saturday to lend Spain up to 100 billion euros ($125 billion) to shore up its teetering banks and Madrid said it would specify precisely how much it needs once independent audits report in just over a week
While the EU is great at announcing grand plans, the execution is usually (always) less than competent. As usual, the announcement is grand, the details are sketchy. What we do know is telling, it took the EU Fin Mins only 2.5 hours to agree to a bailout, which when compared to the long Greek saga tells you something about the urgency and importance of Spain. We also know the IMF will not be contributing funds. As we heard in the original new stories about Berlin and Paris pressing Spain to seek a bailout, it seems this is confirmed in the Reuter's article, "Sources involved in the talks said there had been pressure on Madrid to make a precise request right away, but Spain had resisted." The catch? The same as always... "The issue, however, is there is still a lack of detail about where the money's coming from, which is crucial. The market will treat it with some caution until they see how it will be funded."
The only two possible options (which really are not realistic) are the EFSF or the ESM. The catch again is the ESM has not been ratified by Germany yet and if the money were to come from the EFSF, Finland wants collateral. Spiegel reports that Merkel is not serious about a European Financial Transaction Tax which opposition parties in Germany are quite serious about. If Merkel isn't serious about playing ball, she'll have a hard time getting the 2/3rds vote (she needs opposition party votes) to ratify the ESM and the EU's fiscal pact. You can guess what happens to the Spanish bailout if the ESM is not ratified.
From Reuters:
(Reuters) - A media report that German Chancellor Angela Merkel is not serious about implementing a European financial transaction tax threatens to undermine an initial deal struck last week with the opposition over the EU's planned fiscal pact.
Der Spiegel weekly reported on Sunday that Merkel's Chief of Staff, Ronald Pofalla, had said such a tax would not get passed in the current legislative period so the centre-right coalition could support the idea in principle knowing it would not have to act on it any time soon.
She wants to push the pact through parliament in the next few weeks together with a bill on the new European Stability Mechanism (ESM) bailout fund which Spain may use, but needs the opposition to get the required two thirds majority.It would be a major embarrassment if Germany, which as euro zone paymaster dictates much of its crisis response, missed its deadline for ratification on July 1 when the ESM is due to take effect.
"Whoever plays tricks risks the failure of the fiscal pact," said senior Greens politician Volker Beck.
Germany will not be able to get a financial transaction tax imposed across Europe due to opposition from Britain and some other EU members.
While a big part of the Spanish bank failures had to go with a Spanish property bubble, another cause was contagion from Greek debt which raises fears that Italy may be sucked in through contagion.
Unlike Greece, Ireland and Portugal, "thus far" the aide is specifically meant to recapitalize Spanish banks rather than being more sovereign focussed. Conditions in the plan did not appear to add to the austerity measures and structural economic reforms, which has already sent Ireland in to a fit, demanding like treatment.
From the AFP: "Ireland wants to renegotiate its rescue plan to benefit from the same treatment as Spain, which looks set to win a bailout for its banks without any broader economic reforms in return, European sources said on Saturday."
"Ireland raised two issues: one is the need to ensure parity of the deal with Spain retroactively on its bailout from EFSF," one European government source told AFP, referring to the temporary rescue fund, the European Financial Stability Facility."
"Unlike Ireland, Spain's economy minister said a deal on financing for the country's troubled banks would not impose any conditions on the wider economy.
Dublin plans to raise the issue during the next meeting of eurozone finance ministers to be held June 21, the sources said.
This of course will leave room for Greece (with elections on June 17th), assuming Syriza wins, to break the "Memorandum" or conditions fixed to its bailout. As it now seems that the countries in greatest need of help hold all the power cards with the Spanish getting a very sweet deal, this may in fact boost Syriza's polling. Let's look at this for what it was, it wasn't like past bailouts with countries accepting harsh austerity and other conditions, this was the EU virtually begging Spain to take the money. Talk about moral hazard, if any of these PIIGS can sabotage their economy enough to threaten the EU' existence (more so than now), it looks like they can virtually write their own checks.
Another thing to watch are Spanish bonds as the 3% loan is far lower than the 6+% Spain is paying on 10 year debt. There are some initial report that the banking bailout via the ESM (which ironically was never supposed to be used for a direct bank bailout) may not be without conditions and those conditions may subordinate Spanish debt holders. In short, there's a strong possibility that the seeds have been sown in Spain for a Greek like PSI debt restructuring in which none other than you know who gets stiffed, the Spanish debt bond holders. This is probably too early to tackle, but it seems last week after nearly 4 months of inaction, the ECB was in the secondary market supporting Spanish debt. If you recall several posts I published, the more debt the ECB holds of any nation, the larger the Public Sector write down will be. Mark my words, WATCH HOW SPANISH 10 years trade over the coming weeks!
As for the other weekend event, Chinese economic data, export growth was much stronger than expected at 15.3% vs consensus of 6.9%, Imports were up 12.7% vs consensus of a 3% increase however there was a drop from April to May in retail sales (14.1% to 13.8% on consensus of 14.2%), Industrial production came in at 9.6 vs 9.3 in May (yoy) missing consensus of a 9.9% rise. Continuing with the mixed bag theme, inflation was lower than expected, CPI rose 3%, down from 3.4% in April, PPRI fell 1.4% after an April .7% decline. Consensus was for 3.2% CPI and 1.1% contraction in wholesale prices.
Overall that data was a mixed bag and taken as Trade up, but the economy is sagging, however not in free-fall. A more positive tone is expected in the second half of the year on interest rate cuts and lowering of Reserve Ratio Requirements.
Overall, while some details from this weekend and lack of detail are surprising, the reaction thus far in the markets is not. Just go back to Friday's posts which showed the market performing better than correlations would otherwise indicate, ES saw confirmation all day as it moved higher and most importantly, our leading indicators in the Risk Asset Layout all looked positive, take a look at that post if you have time. Most importantly the risk on credit markets we follow were acting very well.
In fact, the European credit markets were acting well too...
Credit leads, stocks follow, European Financial Credit outperformed financial stocks easily, the same kind of action seen in our own indicators from the post linked above from Friday which we had seen earlier in the week as well.
There's really not much I can add that we didn't already see and know, especially with regard to the intermediate signals we have been getting and the Friday posts, especially the two linked above.
While I don't believe for a minute that anything is even closer to begin fixed in Europe and I don't believe this Spanish bailout will be nearly as smooth as initial Sunday opening trade indicates over the next few weeks, the market is about sentiment and headlines and this weekend provided them.
As I mentioned in the posts linked above, just about everything we have been expecting has played out almost exactly as we expected, this isn't based on wild guesses but the charts and looking in places where few others look.
Here's the market's reaction as it opened Sunday...
Remember on Friday the 3 tests of resistance that all "seemingly" failed and the market action on Thursday in which it seemed the invisible hand was helping the market lower to sucker in more shorts on what again would have "appeared" to be a failure of the test of resistance. All of this was predicted before the initial head fake move even started, remember the "anchoring expectations" post? The market is never going to make it easy, but I'm reminded of Jesse Livermore's admission that it wasn't hi being right on the market that made him money as many people were right and still lost money, it was his "sitting" that made him money.
I think this chart from Friday's, "Nice Close" post and the comment below it explain recent action pretty fairly.
"The SPX daily chart had a VERY different tone to it yesterday, thus the reason I believe the invisible hand of Wall Street helped push the market lower during the last hour. As of yesterday the Candlestick pattern was a classic shooting star reversal and right near resistance: 1) it appeared the test failed 2) this is one of the first short set ups I learned when I first started using TA, you wait for a break of support, then a bounce back up to it that doesn't break through resistance and you short it there with a stop just above resistance. Combined with the candlestick pattern it would have been a classic set up for bears. Today however the confirmation candle that should have been a lower low was not there, instead a higher close, so I'm sure some shorts are nervous about this close."
"Some bears may develop a slight bald spot from a lot of head scratching over the weekend, but as I say, Wall Street never makes anything easy, just compare today to yesterday."
The main themes that have played out and have allowed us to have a good idea of what was going to happen in the market since the bear flag/pennant formed have been and remain summed up in these 3 charts.
The $USD seeing a positive divergence on May 1 and now reaching all the way out to a 60 min chart with a leading negative divergence-all market positive in the intermediate term. Just remember what the Primary trend looks like. It looks like our plans are panning out, just remember the market is not going to make this a cake walk, but when in doubt, go to the big picture.
I'll see you soon.
No comments:
Post a Comment