Well as predicted yesterday, Spain's Rajoy won the election in a landslide as Spanish bonds started hitting the insolvency level and Spanish voters panicked. The problem in Spain as well as Italy and Greece, the newly elected or in some cases like Greece, not elected, technocratic governments who promise reforms and thus give the market a 1-2 day sugar rush rally face uphill struggles and almost insurmountable challenges as firstly reforms take years to implement and see results, secondly, reforms sound good to voters when they are panicked, but when the actual reforms come, the voters revolt against them as we saw in Italy last week. Italian voters were all too happy to rid themselves of Berlusconi and put their future in the "responsible hands" of a Goldman Sachs advisor (add him to the Goldman Sachs former employee now running the ECB-which makes one wonder when Sarkozy will be replaced with a GS alumni?), but the minute he started promising reforms which included reducing the retirement age, taking-NOT TAXING, BUT TAKING .60% of all privately held Italian bank accounts and re-introducing a tax on properties that had vanished, the Italians were in an uproar and remain so. The last point is similar to the first, reforms have no chance in terms of time and results when put up against the bond vigilantes that send countries' debt yields over the 6-7% line, in which debt becomes unsustainable and the countries are faced with a default, which sent Greece, Ireland and Portugal all racing for a bailout, but at 4 times the combined size of all 3 formerly mentioned countries combined, there are no bailout funds left, even if the EFSF could be funded, it did not allow for enough money to bailout a country the size of Italy. Other then that, they need to leverage the fund up by a trillion dollars and thus far have had to buy their own debt in secret to make what was supposed to be an EFSF $10 billion dollar debt auction (which was then reduced to a $3 billion dollar issuance) not seem like the total failure it was. So $3 billion down, a trillion to go and no money for Italy or Spain!.
As mentioned, the Spanish election sugar rush could be overtaken by events in the EU, but we would not know until 3 a.m. EDT when Europe opens and I already showed you the overnight ES chart and the negative divergence before Europe opened that sent the ES lower.
And why? Take your pick of the following events:
In the USA:
"Washington's most ambitious effort in years to come to grips with its mounting debt is set to end with a whimper on Monday as negotiators plan to announce they have failed to reach a deal.
The
Republican and Democratic leaders of a 12-member congressional "super
committee" are set to declare defeat in a joint statement to be
released after three months of talks failed to bridge deep divides
over taxes and spending.
Super
committee members said they are still talking, but they were not
hopeful of a deal.
"I
wouldn't be optimistic. I don't want to create any false hope here,"
Republican Senator Jon Kyl said on Fox News. He said the panel would
release a statement by the end of the day."
Ratings
agency Moody's believes the recent rise in interest rates on French
government debt and weaker economic growth prospects could be
negative for France's credit rating, newspaper Le Figaro on Monday
reported the agency as saying.
France
has a top-notch triple-A rating. On Oct. 17, Moody's said it could
place France on negative outlook in the next three months if the
costs for helping to bail out banks and other euro zone members
overstretched its budget.
As I have mentioned, the real barometer of risk can be found in French bonds as they ARE NOT eligible for ECB intervention like the Italian and Spanish bond markets, what you see is what you get with France. Today the French 10-year yield rose by 14 basis points to hit a very high (for France) yield of 3.61%, this IS contagion moving from the PIGS and straight into the Core.
Spain hit 6.57% today, very close to the 7% mark that sends countries in to a tailspin and as I noted last weekend, Spain has been long ignored, but they are about to comeback into the limelight, little did I know it would happen the very next day.
Even with EB intervention, Italy hit 6.75% and is moving bak toward the high above 7%, new government be damned.
China...
As I talked about last week, the notion of a Chinese "soft landing" is undercut by the real facts on the ground and the pieces of the puzzle that are easily assembled, despite what the opaque government says. Commodities were one of the first signs that China may in fact be in trouble.
"A
senior Chinese official, Chinese Vice Premier Wang, said yesterday
that a ‘chronic’ long term global recession is certain to happen
and China must focus on domestic problems."
Another way to read that is the EU can forget about China investing in the EFSF. Or that commodity action has indeed shown us an early sneak peek of trouble in China. A third way to read that can be taken from this news piece from Reuters...
Wang
said an "unbalanced recovery" may be the best option to
deal with what he had described on Saturday as a certain chronic
global recession, suggesting Beijing would bolster its own economy
before it worries about global imbalances at the heart of trade
tensions with Washington. (Or in other words, Obama's recent chiding of China, such as telling them to "behave like adults" because of the massive distortion in the US/Chinese trade surplus, is now going to take a back seat to a "China First Policy")
His
comments suggested that Beijing should attend to bolstering China's
own growth before it worried about global imbalances. In other words,
a strong Chinese economy that brings a continued trade deficit with
the United States would be better for the world economy than a
slowdown in China itself.
"The
one thing that we can be certain of, among all the uncertainties, is
that the global economic recession caused by the international
financial crisis will be chronic," he was quoted as saying by
the official Xinhua news agency.
China's
growth slowed to 9.1 percent in the third quarter from 9.5 percent in
the second-quarter and 9.7 percent in the first quarter, but the rate
remains in Beijing's comfort zone. (All Chinese propaganda aside, the numbers are probably much worse, but shows in fact that China has seen 3 consecutive quarters of decline and now they are VERY concerned about what they call a "Certain chronic global recession", this as well as commodity trade highlights the fact that the Chinese economy which is experiencing its own real estate crisis right now, is in a lot more trouble then we realize)
Out of Europe today...
"These
are very challenging times... The sovereign debt crisis has
re-intensified and is now spreading over to other countries including
so-called core countries. This is a new phenomenon,"
We know France is infected, but what about the final man standing, Germany?
(Germany's) Bundesbank
slashed its 2012 German growth forecast to 0.5%-1% from its previous
forecast of 1.8%, sees German economy entering 'difficult waters' in
the coming months
I think the question was just answered.
EU's
Rehn said that the sovereign crisis is hitting core Eurozone
countries, and there should be no illusion
"T
his
is not news to anyone, and certainly not to European banks, which
have seen their deposits with the ECB (or a safe haven for any cash
within the European interbank system) rise at the fastest rate in
years, if not ever, since the last MRO. It has taken just 11 days to
go from €73 billion on November 8, post the most recent LT
liquidity operation, to €237 billion. We expect the total to
surpass the two years high of €300 billion in under 5 days."
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