Good morning. One of the key things that has kept hope alive for stock market investors over that past two years is that the European debt crisis would eventually end. As each and every deadline and/or EU Summit has come and gone, investors have been able to breathe a sigh of relief that the sky did not fall. And given that the sun did indeed rise after each and every big, bad event, the stock market eventually moved on from the debt mess across the pond.
With word that the latest threat to the global banking system - Spain (EWP) - is being "handled" (a term that is used loosely these days) by the eurozone's EFSF/ESM, it occurs to me that we might see some reaction in the markets on Monday. Although this report is being written before any of the futures markets or overseas markets open on Sunday night, I'm guessing that at least some of the record-high level of shorts in the euro (FXE) may want to run for cover on word that Spain's bank recapitalization means the eurozone won't crumble just yet.
And while Ms. Market often does her level best to do the exact of opposite of what might be expected, if the euro rallies on the Spain news, the greenback will likely fall. And we all know what happens when the dollar falls... Yep, the "risk trade" switch gets flipped to the "on" position. In response, US stocks (SPY), emerging markets (EEM), and commodity indices (DBC) - especially (USO) and copper (JJC) - get the bids from the algorithms and there are smiles all around. Well, at least for a while, anyway.
On the other hand, I guess there is a chance that the bears could prevail here in the near term on the idea that Spain is just the latest in what will likely be a long line of bailouts. So, while I'm guessing that short-covering in the euro will lead to a pop in stock prices, I'm also willing to admit that absolutely nothing will surprise me on Monday.
To be sure, this market has little memory from one day to the next and oftentimes there is no memory from one hour to the next as the boyz and their computer toys seem to be the only players in the game right now. So, should something bright and shiny catch the attention of the A.D.D. uber-fast money traders, investors of all shapes and sizes have to be ready for a change in course.
My key point however, is that although one eurozone (EZU) issue appears to have been resolved (kinda, sorta) this weekend, the next one is right around the corner. As such, I am hard pressed to see how stocks can escape the current headline/rumor-driven environment anytime soon. For example, no sooner has the ink dried so to speak on the eurogroup's statement on how Spain's bailout loans (which will total up to €100 billion this go round) will be handled, than two other "issues" have cropped up.
First there is the "what about me?" issue involving the way Spain is being treated. While Spain has indeed already implemented fiscal reforms ahead of its request for aid, it is quite clear that Spain is being treated differently than Ireland, Portugal, and Greece in terms of the sweeping economic reforms demanded by the eurozone in return for bailout loans. As such, Ireland is already asking to be treated in the same manner as Spain and according to AFP, said on Sunday that it wants to renegotiate its bank rescue plan.
And then there is the upcoming Greek election on June 17th. Recall that up until Saturday's Spain's bailout announcement, the EU in general and Germany (EWG) in particular had told the Syriza party in Greece to pound sand with regards to the extreme-left party's intention to renegotiate Greece's bailout deal (the primary pillar on which Syriza is running). EU leaders have publicly told Greek politicians not to mislead their constituencies on the subject, effectively saying, "It ain't gonna happen."
However, with the EU now setting a precedent that Spain is to be treated differently, Greece's anti-bailout Syriza party would appear to have a leg to stand on. As such, the next big, bad event in Europe is just a week away.
Thus, the key question in my mind at this stage of the game is if the market will be able to move away from the minute-to-minute focus on the eurozone's debt problems any time soon. In other words, does this volatile, news-driven environment ever end?
Turning to this morning ... Asian markets finished up on the back of the announcement that Spain will received up to €100 billion to bailout its banks. European markets and U.S. stock futures followed suit in the early going but have since given back more than half the gains. One of the keys is that the euro is not seeing the type of short-covering rally that might have been expected. Thus, there is talk that the opening rally will be used as a profit-taking opportunity for the "buy the rumor, sell the fact" crowd.
- Major Foreign Markets:
- Australia: NA
- Shanghai: +1.07%
- Hong Kong: +2.44%
- Japan: +1.96%
- France: +1.05%
- Germany: +1.31%
- Italy: -0.67%
- Spain: +1.42%
- London: +0.44%
- Crude Oil Futures: +$0.59 to $84.59
- Gold: +$2.10 to $1593.50
- Dollar: higher against the yen, euro and pound
- 10-Year Bond Yield: Currently trading at 1.639%
- Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +8.19
- Dow Jones Industrial Average: +82
- NASDAQ Composite: +13.29