Understanding Tuesday's News: Spanish Recession Weighs On EU, U.S. Shares

Includes: C, DB, EWP, EWQ, SAN, UDN, UUP
by: Markos Kaminis

Spanish data is driving the euro region lower this morning, with all major indexes down on the day. U.S. futures started lower on the news as well. Spain's GDP contracted by 0.4% in the second quarter, in line with a previous forecast but down from the first quarter's drop of 0.3%. Expanded spending cuts on painful austerity measures cut into Spanish consumer spending, leading to a widened budget deficit.

Yet, Spanish bond yield's touched a three-month low at auction today. Bond yields are down more than 130 basis points since late July on the 10-year bond benchmark. Still, the IBEX 35 was down a half point when measured here this morning. Still, the iShares MSCI Spain Index Fund (NYSEARCA:EWP) seems to be finding some footing, as more aid for the peripherals of the EU seems to be on the way. Spain's Prime Minister Mariano Rajoy is scheduled to meet with EU President Herman Van Rompuy today to discuss just that.

Chart foriShares MSCI Spain Index

The Spanish recession is certainly not being remedied by austerity today, as consumer spending declined 1.0% in the second quarter. A Deputy Economic Minister called the current state of Spain's economic cycle, the "moment of steepest fall", and said it would continue into the second half of the year. Spain's big hope is that the European Central Bank (ECB) might buy its bonds to help lower its borrowing costs. In a new bond offering today, Spain managed to raise more funds than expected. Unfortunately, there's little confidence being expressed by Spaniards, with private sector deposits at Spanish banks down 4.7% in July.

International Markets



EURO STOXX 50: -0.6%

S&P/ASX 200: +0.4%

DAX: -0.5%

Nikkei 225: -0.6%

CAC 40: -0.7%

Hang Seng: +0.1%

FTSE 100: -0.2%

Shanghai Shenzhen CSI 300: +0.5%

IBEX 35: -0.5%

India's BSE Sensex 30: -0.3%

Prices measured at 7:45 AM EDT

Separately, French officials announced a gasoline price reduction of approximately six euro cents per liter, as a campaign promise of President Francois Hollande is fulfilled. The CAC 40 decline of 0.7% was leading the region lower, despite the move. The iShares MSCI France Index (NYSEARCA:EWQ) has risen recently as France has gained with most markets, but it's vulnerable today.

The euro rose Tuesday against the dollar on that same ECB hope. Mario Draghi will speak in Jackson Hole this weekend, following Ben Bernanke's highly heralded speech scheduled for Friday morning.

The PowerShares DB U.S. Dollar Index Bearish (NYSEARCA:UDN) looks to benefit this morning, as the PowerShares DB U.S. Dollar Index Bullish (NYSEARCA:UUP) is down in early trade. The euro rose 0.4% this morning to $1.2547. The euro is likely to face a test after its recent rally, especially if Mario Draghi can only offer more talk without follow through, as I expect this weekend. However, before long, I also expect the ECB to buy hard-pressed euro nation bonds; investors are keeping that in mind as well.

The shares of major European banks face a test today, but action should be kept in check by the pending discussion from Jackson Hole.

Banco Santander S.A. (NYSE:SAN) is lower 1% in early trading today on the poor Spanish data, and faces a tough go today. Shares of Citigroup (NYSE:C) are down fractionally and Deutsche Bank (NYSE:DB) as well. Europe weighs on U.S. stocks today, and has the SPDR S&P 500 down fractionally in early going.

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.