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6/11/2012 1:51 PM
Anxiety over Greece
By Charles Payne, CEO & Principal Analyst
The anxiety over the vote in Greece continues to weigh on the market with threats of retaliation getting meaner and meaner. The latest scuttlebutt is sending a message to Greece that if you want out then you are going to have a hell of a time getting back in. According to reports from Reuters there is talk of the EU leveling Greece with a bunch of rules that would return the nation to an isolated city-state.
* Capital controls
* Border checks
* Limiting ATM withdrawals
* Suspension of Schengen
In 1985 five of the ten members of European Economic Community signed a deal in Schengen, Luxembourg that effectively made intra-country travel passport free. The removal of physical barriers is as important as monetary or budget barriers and soon the EU Incorporated the agreement into its bylaws. The law covers a wide swath and millions of people, and to be cut out of that would be the death knell for a nation that relies on visitors to prop its already shaky economy.
* 26 European countries
* 400 million people
* 4.3 million square kilometers
The stakes are high for everyone, but I don't think the people of Greece want to be so isolated, after all, most would like to be able to visit their money without a passport.
Europe on Focus
By Carlos Guillen
Equity markets sank into losing territory after making a nice start to the trading week this morning. The News that Spain was set to receive a bailout in the amount of $126 billion and data from China all served to give investors a momentary sigh of relief. However, this did not last long as investors are coming to the realization that the Spanish bailout might not be enough and that other major European players are increasingly at risk of faltering as well.
The news from China was mixed as the nation's exports rose in May at more than double the pace analysts had forecasted. However, industrial output and retail sales trailed forecasts, signaling that last week's interest-rate cut was aimed at countering a domestic slowdown. Exports in May leaped 15.3 percent from a year earlier, up from April's rise of 4.9 percent. Industrial output gained by less than 10 percent for a second month and retail sales increased the least in almost six years excluding holiday-month distortions. So it is more apparent that China is slowing from within, although they are getting assistance from abroad. The question is, however, given the situation in Europe and the slowing growth here at home, how much longer exports will help China.
Now that Spain seems to be safer than it was before the weekend, investors are questioning whether the bailout was enough to prevent the contagion from growing further, particularly to Italy. This was reflected in Italy's 10-year bonds as they increased over 20 points, coming close to 6 percent. With more than 2 trillion euros in debt (more than twice that of Spain), Italy will certainly be the new focus of attention for investors. Italy currently stands as the third largest euro zone economy, but its growth has lagged the zone's average for more than 10 years, and this year it is predicted that Italy's economy will contract by 1.7 percent, more than the 1.6 percent predicted for Spain. Given the size of the Italian debt many are wondering if it will be possible to bail out the nation, particularly after all that has already been spent bailing out other euro zone members.
This coming Sunday all eyes will be focused on the Greek elections. So far it looks as if the pro-bailout New Democracy party will win, but even if that happens, it is difficult to see how they will form any type of coalitions given the growing anger of civilians as they are forced to take austerity measures. This upcoming event will surely bring lots of volatility to equity markets for the rest of the week.
Chinese Trade Holds Up
By David Urani
While the market regurgitates the Spanish bailout, all is apparently not so bad in China. Whereas the market was looking for their May trade surplus to shrink amid European weakness, it actually grew a little bit, to $18.7 billion from $18.4 billion. Although Europe was indeed weak, the Chinese say that demand from the USA made up for it. Oil imports also surged, although the price of oil has been falling. And believe it or not, the levels for both imports and exports were at record highs.
Nevertheless, there are still worries considering other data that has failed to impress, such as industrial output that is only slightly above a 3 year low. That's why the government has been eager to lend a hand, including some loosened lending restrictions that raised new loans by 16% to $125.9 billion last month; that comes before the interest rate cut announced last week.
Of course, China's trade numbers largely reflect unexpected strength in the USA and don't necessarily indicate that China is doing better domestically; in fact, multiple production indicators and retail sales suggest the opposite. And speaking of the USA, it just so happens that the Chinese yuan saw its biggest monthly drop on record in May; no wonder export growth outperformed expectations. Maybe this is the cue for the White House to bring up the currency manipulator talk again.
In the meantime, we'll be looking to see if China's domestic economy picks up, boosted by increased lending and the recent interest rate cut. But even if China remains slow to recover, we wouldn't wave the white flag because by the looks of it inflation is in check. Consumer price growth slowed to 3.0% from 3.4% month to month, its slowest pace since June 2010. That means Premier Wen probably has more ammo should he be need it.
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