Monday, June 11, 2012

Markets lose ground after Spanish bailout

Dow fell 34, decliners over advancers 3-2 & NAZ was off 9.  The Financial Index dropped 1 to the 188s, after a big gain last week.

The MLP index rebounded, up 1+ to the 365s but the REIT index fell 1 to 251.  Junk bond funds were mixed (following a good week last week) & the 10 year Treasury inched up to bring a slightly lower yield.  Oil fluctuated amid concern that Spain’s request of a bailout will move other countries to the forefront of Europe’s debt crisis, which is slowing economic growth & reducing fuel demand.  Gold  also was about even.

JPMorgan Chase Capital XVI (AMJ)

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CLN12.NYM....Crude Oil Jul 12...84.22....Up 0.12  (0.1%)

GCM12.CMX...Gold Jun 12.....1,590.40 ...Up 0.30  (0.0%)

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Spanish Prime Minister Mariano Rajoy

Photo:   Bloomberg

Spain’s request for a €100B ($125B) bailout may provide enough money to shore up its banking system after 3 failed attempts.  The amount sought is almost triple the amount deemed necessary by the IMF in a report released Fri & 5 times the total requested by the Bankia group, the country’s 3rd-biggest lender, to cleanse its balance sheet.  Spain sought aid for its banks on Sat, becoming the 4th euro member to seek a bailout since the debt crisis began.  The rescue request followed weeks of escalating concern that bad loans at Spain’s banks might overwhelm public finances.  The Spanish crisis, coinciding with the prospect of Greece exiting the euro after elections on Jun 17 sending the € to an almost 2-year low on Jun 1 & raised Spanish borrowing costs to near euro-era records.  The Spanish story is far from over.

Spain’s Bailout Gives Rajoy Best Chance to Fix Banks

S&P Says India May Be First BRIC Nation to Lose Investment Grade

Photo:   Bloomberg

There are debrt problems outside of Europe.  India may become the first BRIC nation to lose its investment-grade credit rating after S&P, cited slowing growth & political roadblocks to economic policy making.  Setbacks or reversals in India’s path toward a more liberal economy could hurt its long-term growth prospects and, therefore, its credit quality,” S&P said.  India is rated BBB-, one level above junk & the lowest in the BRIC group, which also includes Brazil, Russia &China.  The GDP rose 5.3% in Q1 from a year earlier, the least in 9 years, stoking concern the nation’s economic prospects have deteriorated as policy gridlock deters investment & Europe’s debt crisis crimps exports. S&P also lowered India’s credit outlook to negative from stable in Apr, contrasting with ratings upgrades in Asian nations from Indonesia to the Philippines in recent months.  The currency has slumped 20% in the past year.  “Fiscal slippage, combined with persistently high inflation, could further weaken investor confidence,” S&P added.  “Both the government’s debt burden and fiscal flexibility could continue to erode, in step with rising external vulnerability because of higher trade and current account deficits. India’s credit quality would suffer under such a scenario, and a downgrade could result.”  There is nobody around big enough to bailout India, if it comes to that.

After Spain’s bailout Italy moved to the front line of Europe’s debt crisis.  Italy’s 10-year bonds yield shot up 20 basis points to 5.98%.  Italy has €2T of debt, more as a share of its economy than any developed nation other than Greece & Japan.  The Treasury has to sell more than €35B of bonds & bills per month.  Italy is on track to bring its budget deficit within the EU limit of 3% of GDP this year & the country is already running a surplus before interest payments, meaning its debt will soon peak at about 120% of GDP.  The jobless rate is less than half of Spain’s 24% & Italy didn’t suffer a real estate bust, leaving its banks healthy by southern European standards.  But Italy’s total debt of more than twice Spain’s has given investors pause, especially in a country where economic growth has lagged the EU average for more than a decade. The euro region’s 3rd-biggest economy is set to contract 1.7% this year, more than the 1.6% in Spain according to the Organization for Economic Cooperation and Development.  Italy is on the bailout watch list.

Italy Moves Into Debt-Crisis Crosshairs After Spain

In a strong market, the Spanish bailout would have brought out buyers in droves.  The gut reaction for Dow futures last night had Dow up 140.  This morning, ahead of the opening, the gain had shrunk to 50.  Now Dow is in the red.  2nd thoughts about the bailout are clearly negative.  The are plenty of sovereign debt problems out there, not to mention it's not clear how much good the massive bailout will do.  Under the radar screen is the Obamacare & the Supreme Court will hand down a ruling about its fate in the next week or 2.  Either way, the decision could move markets.  Dow's inability to follow thru after last week's big advance sends a negative signal for this week.

Dow Industrials

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