High-yielding assets are in retreat to kick off the trading week as escalating worries in the euro zone shake investor confidence. European bourses are firmly in the red mid-way through their session after reports were released over the weekend that up to six further Spanish regions might be following on Valencia’s heels and requesting a bailout from their government.
Spain created an €18bln bailout mechanism last week to help cash-strapped regions, but the size of the fund will likely be insufficient to deal with all the regions that could end up needing access, decreasing the Spain's chances of avoiding needing a full-blown sovereign bailout.
Both the EUR and Spanish sovereign debt were clobbered during overnight trade, with the common currency trading through its historical average against the USD (1.0287) and yields on Spanish ten-year debt trading on the ugly side of 7.50%. The negative sentiment has prompted Spanish regulators to ban short-selling on its stock market for three months—not just on financials, but all stocks.
North American equity futures are faring no better, with the major averages looking to open sharply lower as the flight-to-safety trade migrates across the Atlantic and picks up steam on the back of the Spanish short-selling ban. The Loonie is soft before the bell this morning, with the USDCAD pushing towards the 1.0200 handle as the commodity currency feels the brunt of weakening oil and lagging equity performance. West Texas Intermediate hit a low of $88/barrel, down almost $4/barrel as European worries rock high-yielding assets; gold is also following other commodities lower, changing hands below the $1,570/ounce mark.
IMF Turns Up the Heat
It seems that the IMF is growing tired of the usual Greek song and dance, and as the fiscal imbalances of the struggling nation re-emerge into the spotlight, has decided to throw its weight around. After scrambling for most of last week to identify just under €12bln that can be scrapped from the government budget, Greek coalition leaders could only agree to €8.1bln of savings, and will have to continue talks this week. Greece’s Finance Minister Yiannis Stournaras said that the talks would continue right up until the troika returns for its scheduled visit this week, as the Greek lenders are once again in town to conduct another examination of the government’s economic reforms, and determine whether enough progress has been made to warrant the next tranche of funding.
The cuts were originally due to be finalized in June, but were delayed after Greece was forced to hold a second election. The €11.5bln belt-tightening was agreed to as part of the second bailout package, and being equivalent to 5.5% of the country’s GDP, is intended to narrow Greece’s budget deficit to under 3% by the end of 2014.
Growing weary of what seem like more empty promises, the ECB ratcheted up the pressure on Greece and announced that it would stop accepting the country’s bonds as collateral in return for ECB funding, at least until the troika review has been conducted this week. The move will make funding for Greek banks more expensive, and is aimed at increasing the pressure on Athens to adhere to the commitments of the previously agreed upon bailout.
The IMF now seems to have joined the party, as German news magazine der Spiegel reported on Sunday night that the IMF has told the EU it will provide no additional funds for Greece. Obviously, without further funding from the IMF, the possibility of a Greek bankruptcy is all the more likely, potentially coming as soon as September. To make matters worse, Alexis Tsipras, the leader of the main opposition party in Greece, was quoted over the weekend predicting the country’s default, and forecasting that the government would soon hail the return of the drachma as a national success.
It would appear that the hotter-than-normal temperatures in the US Midwest have drifted overseas to Athens, where pressures to adhere to the conditions imposed by the troika bailout are increasing. The Greek collation government continues to falter, failing to uncover the necessary cuts, as the opposition declares defiantly that any payment extensions from the troika are “essentially a longer rope with which to hang ourselves.”
The EURUSD gapped approximately 40pts lower as Sunday night trade commenced before gaining momentum and continuing its downward trajectory as Greece and Spanish solvency issues spooked markets.
On Tap: China and the Euro Zone PMI
With the economic calendar fairly light for the first day of the week, Flash PMI releases from Markit Economics will take centre stage tonight and early Tuesday morning, when readings for China and the euro zone will be released.
June’s seven-month low of 48.1 for China’s HSBC Flash PMI has been revised up to 48.2; however, it still marks the eighth consecutive month in which the reading has been in contractionary territory. Another sub-50 print could bolster speculation that the Chinese government must do more in order to stimulate economic activity, perhaps looking at an additional cut to the amount of capital banks must hold as reserves against deposits.
On Tuesday morning the pace of contraction in the service and manufacturing industries for the euro zone is forecast by analysts to decelerate from last month, with German PMI readings are expected to see a slight uptick from last month’s sub-50 prints. Although the expectations are for the picture to brighten marginally in the region, the indication from the ZEW Economic Sentiment survey released last week paints a different picture. The main ZEW reading for German sentiment fell to -19.6 from -16.9 in May, with the index that measures sentiment of current conditions hitting the lowest level since June 2010 at 21.1, down from 33.2 in May.
If the PMI prints tomorrow fall short of expectations, it is very likely we could see the EUR sell-off continue, with money continuing to flow to the safety of such currencies as the USD and JPY.
Have a great week!
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