7/20/2012
By Carlos Guillen, Research Analyst

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After three days of making rather encouraging gains, equity markets are taking a down turn during today's trading session as investors get another reminder of just how unstable the situation in the euro region still remains, with Spain lowering their growth forecasts for this and the following year, while increasing its budget deficit above what was originally planned.

Clearly, during the last three days of trading, investors have been compelled to get into equity markets as they have seen that a good majority of companies that have reported so far are delivering better than expected earnings per share; however, it should be noted that many of these companies had provided forecasts that were much lower than normalized earnings growth projections would suggest. In essence, companies have lowered the "bar" in order to beat it. Consequently, equities had been trading higher, and investors had lost their focus on Europe.

Well, that changed today as Spain's treasury minister, Cristobal Montoro, lowered the nation's gross domestic product growth for this year and the next. According to Mr. Montoro, Spain's economy will contract by 0.5 percent in 2013 after shrinking by 1.5 percent this year. A prior forecast had growth of 0.2 percent for 2013. Moreover, unemployment will be 24.6 percent this year before falling slightly to 24.3 percent next year and slipping to 23.3 percent in 2014.

Making things worse was that the region of Valencia revealed it would become the first to tap a new, week-old fund designed to provide liquidity to the country's 17 semi-autonomous regions. This had the effect of shooting up the yield on Spanish 10-year bonds by 0.25 percentage points to 7.22 percent, well above the 7 percent threshold that is considered unsustainable by many economists. The situation in Valencia may be the tip of the iceberg as many Spanish regions are so heavily in debt as a result of the recession and a burst real estate bubble. Consequently, many regions in Spain are finding it difficult to raise money at affordable rates and are struggling to repay creditors and settle contract bills.

While the situation in Spain is nothing new, investors had forgotten that all is not well in Europe and had focused on earnings here at home. Well that has changed today, and as such the Dow Jones Industrial Average is down close to one percent. Next week earnings season will continue, but things may be different as investors will keep a broader view of what is happening around the world.

Carlos Guillen
Wall Street Strategies