The results are in, and Thursday's Spanish 2- and 10-year bond auction was a success in terms of demand, but a failure in terms of the statistic that matters: yield. Demand was solid, as Spain issued $3.3 billion in bonds, near the top-end of the target range, but the yield on the 10-year rose sharply after the auction after falling as low as 5.77% just prior. At last check the yield on the 10-year Spanish note is higher by 9 basis points to 5.91%. In another indicator of how disappointing the auction was, the IBEX began to slide almost immediately after the sale, falling 100 points in nine minutes, and at time of writing looks set to close down nearly 2% for the session.
This caps off an especially bad week for Europe in terms of crisis-related news. On Wednesday, Jens Weidermann, head of Germany's Bundesbank, opined that the ECB should not use its bond-buying program to help Spain corral its borrowing costs and indicated that the Spanish government should restore market confidence the old fashioned way: by winning back investors with reforms.
The market also learned that bad loans at Spanish banks now total 8.2% of total loan portfolios, the largest percentage in nearly two decades, and a figure which will likely increase substantially as Spain slides further into recession. As it turns out, things aren't that much better in Italy, as the percentage of bad debt in Italian banks' loan portfolios hit 6.3%, double the amount witnessed during the financial crisis.
Italy also announced it would not balance its budget by a previously announced deadline, and on Wednesday, Portuguese Prime Minister Pedro Pasos Coelho said his country likely would not return to international capital markets in 2013 as planned, citing--and here's the best part--"realism." Finally, credit default swaps on French banks BNP Paribas (BNPQY.PK), Societe Generale (SCGLY.PK), and Credit Agricole (CRARY.PK) rose 20, 19, and 30 points, respectively, this week.
The news hasn't been any better in the U.S. Earlier this week, the Empire State Manufacturing Index fell to its lowest level in six months and the NAHB survey on Monday was a disappointment to say the least, falling 3 points, its first decline in more than a half a year, as the Homebuilders Association noted that although people are looking at homes, they aren't necessarily buying them.
Additionally, in the latest example of how the employment picture is not getting any brighter, weekly jobless claims fell far less than expected last week to 386,000 versus economists' estimate of 370,000. Perhaps most disturbing, however, is that the previous week's number was revised upward to 388,000 from 380,000. And finally, the Philly Fed Index missed by a wide margin as well, falling to 8.5 (economists were expecting a reading of 12), its lowest level since January.
All of this paints a decisively gloomy picture. It is important to remember that despite all the bad news and rhetoric, the second domino has yet to fall in Europe--in other words, we haven't seen anything yet. The longer a pullback is in coming, the more dramatic it is likely to be when it finally arrives.
Bet against the S&P 500 (SPY), Banco Santander (STD), Banco Bilbao Vizcaya Argentaria (BBVA), and BNP Paribas. I would wait for a pop in those names, however, as the banks are down pretty substantially today.