Euro Soars As Conditions Sour In Italy And Spain

 |  Includes: FXE, UDN, UUP
by: Ralph Shell

Recently the Non-Farm Payroll report has displayed the plebian characteristics of dull reports. Markets no longer sprint one direction or another because the NFP estimate is a surprise. Today was no exception, as the NFP number, 157K new jobs, was not far from the average guess of 165K. For 2012, the average monthly job growth was 181K, less than the 200+ needed to reduce unemployment, however, adjustments added an additional one-third of a million jobs in 2012

The labor force participation rate remained unchanged at 63.6% of the working age population. This percentage is far less than the peak labor force participation of 67.3% in 2001. The unemployment rate was up to 7.9%, one tenth higher than the December rate.

U.S. equity markets are elated with the numbers and have charged ahead, currently trading up 134 on the Dow (as of this writing). The USD has weakened today against the euro, but has rallied from the lows after the report. Against a wider basket of currencies, the USD is marginally higher.

One of this past week's features has been the strength of the euro versus the USD. There is no doubt the confirmation by Bernanke that he is going to proceed with the purchases of $85B per month until employment is under 6.5% is viewed as USD bearish. The continued expansion of the Fed's balance sheet, contrasted to the ECB's balance sheet contraction after the repayment of bank loans, has the euro bulls excited.

Judging by the market action today with the EURUSD (NYSEARCA:FXE) trading above the 1.37 handle, there may also be some Friday afternoon bears taking their punishment and heading for the exit. It is always hard to fight the money flow. Since the beginning of 2013, speculative money has been buying the euro, with the futures open interest up about 20% or 40K contracts. It is easy to go with the crowd, but there may some reason to be more than a little cautious.

In Spain, the IBEX stock market index has taken a tumble, down about 6% for the week. When you consider unemployment in Spain is 26%, and youth unemployment is above 50%, where does the consumer demand come from? And so austerity took its toll, with December retail sales down 10.7% from a year earlier. Auto production in Spain has dropped by 17%, under 2 million cars per year for the first time since 1993. Contrast this with U.S. auto sales up 11% in January, and the fastest sales pace in four years.

The popularity of PM Rojoy has diminished as the unemployment has gone up. Currently, it is about 15%, and this is before accusations he took cash kick backs during the building boom. Reuters reports the paper El Pais says Rojoy took €25,200 euros for 11 years from a slush fund that was financed mostly by builders.

Continuing, they reported this reaction:

"Hundreds of Spaniards gathered outside party headquarters in central Madrid on Thursday evening in peaceful protests, chanting 'Thieves!' and bearing placards reading 'Resign Now!'"

Italy is another country where there are some festering financial wounds. There are "irregularities" at Monte dei Paschi bank, the world's oldest bank. It now appears that heavy losses were incurred in derivatives. Ambrose Evans-Pritchard reports for The Telegraph:

"Italy risks political crisis as MPS banks scandal turns explosive.. Monte dei Paschi (MPS), the world's oldest bank dating back to 1472, is under investigation for covering up losses on derivatives and paying over the odds for its €9bn (£7.8bn) purchase of Banca AntonVeneta in 2007. Italy's press alleges that the inquiry has unearthed a network of bribes and kickbacks, a claim denied by the bank. "

Complicating the situation, the heavy loses occurred when Mario Draghi was head of the Italian Central Bank, in charge of among other things, bank audits -- not a good recommendation for the future EU bank examiner. Also, the bank has close ties with the political left. The fallout from this scandal may help Mr. Berlusconi's Party of Liberties, currently with 26% in the poles, and an increasingly anti-EU position, gain strength.

There will be a general election for 630 members of the Chamber of Deputies and 315 members of the Senate on the 24th and 25th of February. The accusations and rhetoric will get noisier as we get closer the the election.

The majority is never right for very long. We will be looking for a spot to fade this rally next week.

Click to enlargeClick to enlarge

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.