The bank bailout in Spain will add debt to the government's books, which makes already unattractive Spanish debt less attractive. The loans for the bank bailout have seniority over Spanish bondholders, also making Spanish bonds less attractive to new buyers.
Not surprisingly, both Spanish and Italian bond yields are up sharply this morning, which is not a good sign for risk assets longer-term. Spanish banks were bailed out over the weekend. The governments of Italy and Spain have not been bailed out (yet), which is reflected in this morning's bond market.
This morning's Wall Street Journal highlights the problems that remain:
Yet while the agreement marks an important step in calming global financial fears, much of the euro zone's troubles still haven't been solved. Spain's government didn't receive any direct benefits from this weekend's bailout. That's a problem, as many market observers believe Spain, itself, will eventually need to be rescued. Bailing out the fourth-largest economy in the euro zone would be cataclysmic, especially since Spain is larger than the economies of Greece, Portugal and Ireland combined. If the Spanish government can't retain access to bond markets, a much bigger bailout may be needed.
As we noted over the weekend, we are open to a rally in stocks, but it is prudent to keep an eye on rising yields in Italy and Spain. The video below covers numerous ways to monitor the battle between "risk-on" and "risk-off" this week. Traditional and DeMark charts are shown for the S&P 500 (SPY), foreign stocks (VEU), and the VIX "Fear Index" (VXX).
After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.
We have a shopping list ready to go, but prior to redeploying more cash, we will continue to monitor key levels, such as the ones provided in the video above. Flexibility, along with an understanding of the scope of the debt problems around the globe, remain important for all investors.