The E-Mini Dow shot up overnight to a high of $12,715.00 Sunday evening on news that Spain would take the banking bailout of about $100 billion euros to contain the banking crisis. The Dow has 30 components and 26 were down at the close. The news was short lived as the realization of vague terms and the yield on the 10-year government bond went to 6.42%.
Funding from the European Stability Mechanism would retain the priority credit status leaving the current bond holders with inferior paper. Of course, there will be an independent audit on June 21st to determine the exact amount necessary. It still is undetermined whether the loan will come from the European Stability Mechanism or the European Financial Stability Facility. The European Financial Stability Facility is due to end this month and was thought to take care of previous bailout recipients only such as Greece, Portugal and Ireland.
Greece may have a precedence over this money should the elections on June 17th lean toward a bailout and staying in the European Union. Spain may prefer not to take a loan from the European Financial Stability Mechanism as the fiscal reforms may be more severe. It has been the hope of Spain to stay away from a full bailout so it would not fall under the austerity measures that come with it.
The news managed to spur investors to take funds out of the Spanish banks as Banco Santander was down 0.3%. Housing loans that took the Spanish banking system down will perhaps now be restructured but the looming worry is about Spain's growth and high deficits. It is quite a change for the world coming out of World War II as a global focus on tangible productive manufacturing and building to a universe depending on the rescue money from governments that essentially will need to get the money from its people.
The European Union economic and monetary affairs Commissioner stated that the normal fiscal reforms may not be demanded of Spain. The European Stability Mechanism may even be able to offer direct recapitalization to the Spanish banks.
Fitch's credit rating agency cut the credit ratings for Banco Santander and Banco Bilbao Vizcaya Argentaria to BBB + from A. The bailout contagion may look like a temporary fix in the short-term, but there are issues that prevail and may make the means for now - the means to an end. The sovereignty and general autonomy of each nation may be lost.
· The closer fiscal integration by the European Union of each of its 17 nations will perhaps give-in to one control or one power ruling the financial policies of the countries.
· The closer integration could eventually combine the Euro debt leaving each country at the mercy of perhaps a non-producing neighbor.
· The may eventually impose sanctions to be sure that each country meet its deficit targets.
It is difficult to access the plans of the European Union as the leadership tends to be diverse. China and the US fall into the mix as export demand is contingent on the Euro Zone and the economic health of all nations. China and the US have experienced slowdowns in recovery due to the export slack demand.
Now, this Sunday, the elections in Greece will determine if the radical leftist have the vote and leave the European Union or if the conservative's vote to stay in the euro FX and receive the next trance of bailout funds. The troika will supervise if Greece remains in the European Union. The European Union will meet on June 28th and 29th at the summit to discuss the details of coming events.
Italy may be next in line for a bailout. The Italian debt-to-GDP ratio is set to increase over the long-term. It is thought if the Spanish bonds hit yields of 7% that the Italian bonds will follow. Prime Minister Mario Monti stepped into office as a technocrat, but essentially enforced the same austerity measures as his predecessor.
Cypress also had hinted of a potential bailout as their banks require recapitalization prior to June 30th. The little country had been self-reliant with a healthy tourism business and natural gas reserves. It is thought that Cypress may be duly negotiating a bailout with China as well perhaps to seek out the better deal. Who will be next to put the left hand in?
Today, we have no major US economic reports due out.
E- Mini Dow Chart
Tuesday, what to expect: We maintain a bullish bias unless the (September) E-Mini Dow penetrates $11,967.99. Today, we anticipate an inside to lower day. Monday's range was $12,715.00 - $12,308.00. The market settled at $12,310.00. Our comfort zone or point of control for this market is $12,472.50. Our anticipated range for Tuesday's trading could be $12,523.32 - $12,182.16. The E-Mini Dow is one-tenth of the size of the big Dow.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.