As the world lurches towards June elections in Greece, Spain hits boiling point
Never a dull moment as Greece lurches day to day towards its pivotal election in June; but before Greece is even settled, Spain’s future grows more cloudy. Greece has been the warm up act while Spain, and perhaps Italy, could turn out to be the main events.
The Economic View From 35,000 Feet
Last week’s news was mixed with Europe dominating the headlines. Here’s a quick synopsis:
April new home sales came in better than expected and U.S. stock markets posted gains for the week with the Dow Jones Industrial Average (NYSEARCA:DIA) gaining 0.7%, the Nasdaq Composite (NYSEARCA:QQQ) adding 2.1% and the S&P 500 (NYSEARCA:SPY) gaining 1.7%.
On the downside, the Greek stock market continued its plunge, down on Friday again, and the Athens General Share Index is now at 518, down from its 2007 peak of approximately 5300, a loss of more than 90%. In Europe, economic reports were weak as the Markit PMI Index declined from 46.7 in April to 45.9 in May, a new three year low, and Germany’s (NYSEARCA:EWG) business climate index declined in May. U.S. Durable Goods Report missed expectations while jobless claims stayed flat at 370,000.
But the big, bad news comes from Spain (NYSEARCA:EWP) whose stock market has declined more than 50% from its 2007 highs.
- Bankia SA, the recently nationalized lender, says it needs $24 Billion compared to previous estimates of approximately $19 Billion.
- Spain’s 10 Year government bond continues spiking higher, now at 6.48% and perilously close to the “unsustainable” level of 7% which is the level at which Greece and Ireland needed European bailouts to survive.
- Major region, Catalonia, gave notice that it might need government help with its debt load.
- Three other banks, Banco de Valecia, Novagalicia and Catalunya Caixa, already nationalized, could need a government rescue, as well, with the total bill for all of Spain’s troubled banks higher than $70 Billion by some analysts’ estimates.
- Spain is considering recapitalizing Bankia with sovereign debt which will further add to the country’s debt woes and pressure.
Greece and its travails will prove to be a sideshow (or opening act) for Spain which is the 5th largest economy in Europe and 12th largest in the world.
Next week brings a storm of U .S. economic data with Case/Shiller housing and consumer confidence on Tuesday, pending home sales on Wednesday, ADP private employment, weekly employment, Q1 GDP revision and Chicago PMI on Thursday, and Friday rounds out a huge week with May Non Farm Payrolls, Unemployment, ISM, personal income, personal spending and construction spending.
Bottom line: The fundamental situation remains fluid and full of potential dangers across the globe. Technical indicators point towards the possibility of a short term rally from oversold conditions within the context of the recent downtrend that is likely to continue. Expect intense volatility leading up to the June 17th Greek elections as Spain approaches the boiling point.
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