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6/25/2012 1:44 PM
A Bad Start to the Trading Week
By WSS Research Team
By Carlos Guillen
Equity markets have continued to trade lower after opening sharply down at the start of trading as investors begin to lose hope that Germany will do anything to assuage the European debt situation. All comments from Germany continue to support the notion that it continues to take a firm stance on not providing any type further relief for Greece or any type of debt sharing for Spain and Italy. While most on the Street were gaining confidence that some change of stance or some type of relief efforts from Germany would take place, the reality is that this is not coming to fruition, leading many investors to lose hope. It is this dwindling hope that has equity markets deep in the red, with the Dow Jones Industrial Average down over one and a quarter percent.
As already expected, Spain formally requested the euro zone rescue loans for up to €100 billion ($125 billion) to recapitalize its struggling banks. Spain's Economy Minister Luis De Guindos said that the final amount of the financial assistance would be set at a later stage but should be enough to cover all banks' needs plus an additional security buffer.
One important point that needs to be settled is whether the loans will go directly to the banks or to the government. The Spanish government is pushing for the loans to go directly to the banks, as it does not want to be responsible for repayment. While the International Monetary Fund supports Spain's actions, Germany does not and has ruled it out, insisting that Spain abide by the current regulations under which the money must be given to a government, adding to the nations' debt pile. Clearly, given Spain's huge debt load, the worry is that if the Spanish government is not able to get back the money from the banks, it would be pushed to seek for a bailout just as Greece was forced to do recently. This worry is contributing to the pressure Spanish government bonds are exhibiting at the moment, with the ten-year yield up 30 basis points to 6.64 percent, once again coming closer to the infamous 7 percent limit, which is considered unsustainable. Also contributing to the Spanish bond pressure today were comments from German Chancellor Angela Merkel, who said sharing debt liability within the 17-nation euro area would be economically wrong and counterproductive, putting an end to any hope that a common euro bond would come to existence any time soon.
The European Union will be holding its summit this Thursday and Friday, but the sentiment at the moment is that, once again, there will be nothing concrete coming out of these talks, other than more talks about making further meetings to discuss other meetings. So while investors have probably already priced in this belief into equity markets, there is always the chance that things could turn out to be even worse.
Home Sales Hold Up
By David Urani
Surprisingly, new home sales were up in May, to 369k from 343k, and above the 350k consensus. Not only that, but it was the best result in two years. It seemed very possible that the market crash during the month would have slowed sales, but that turned out not to be the case. That being said, sales were actually down in the West and Midwest, so this was not a national trend. Previously it was actually the West that had been looking stronger because of a shortage of supply, particularly in California. This time the Northeast drove overall sales, and that was somewhat reflected previously in a stronger Northeast reading from the NAR's Pending Home Sales Index which cited solid employment trends, particularly around Boston.
Perhaps home demand on low mortgage rates and perceived bargains is enough to shrug off the general panic in the economy at the moment. That being said, if the economic backdrop stays as it is, we wouldn't expect too much more progress here.
The Rest of the Session
The market is going to hope that Spain's bailout doesn't snowball, as the newswires are now saying Cyprus are officially jumping onto the bailout train as they're asking for emergency funding from the EU. They are likely to need $2-4 billion. And eyes seem to be upon Italy's ability to hold out, as the FTSE MIB was off 4% today (even worse than Spain's IBEX which was off 3.7%). Yet, there seems to be little hope that this week's EU summit will accomplish anything.
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