Very early this morning the 10-Year Note price traded down 10/32 at 1.66% but by 900am was down -3/32 at 1.64% (the 10-Year Note hit 1.72% briefly on the news announcement);mortgage prices at 900am were generally unchanged. Spain abandoned unilateral attempts to rescue its banks and became the fourth country in the 17-member currency union to seek an emergency bailout. The aid blueprint hammered out in an emergency conference call among euro finance chiefs two days ago is designed to create a line of defense if the Greek voting unleashes a new bout of market turmoil. Next Sunday Greece will vote again to form a government, two months ago there was no consensus with the country tilting toward rejecting the EU austerity pushed on it. The most recent surveys showed the main party opposing the terms of its bailout vying for first place.
As the clock ticked on, the positive take over Spain’s cash infusion began to wear off. The stock indexes at 800am were up +100 on the DJIA, at 900am it was up +69. The bond market lost some of its price declines. While the Spain thing is welcome, there are still very high hurdles with Greece’s election and the belief Spain will need more to fend off bank collapses. Next week is a huge weak for the U.S. and global markets. On Sunday the Greek election that at this point is too close to call on whether citizens will essentially vote to leave or stay, recent polls are slightly positive that voters will vote to say. On Monday June 18th there is a G-20 meeting scheduled in Mexico that will focus on Europe’s mess. On Tuesday and Wednesday (June 19th and 20th) the Federal Reserve Open Market Committee (FOMC) meets, on Wednesday the policy statement and Bernanke’s press conference. There is still many that believe the Federal Reserve will announce some kind of QE, most likely an extension of Operation Twist set to expire at the end of the month.
The excitement over Spain’s asking for $125B to shore up its banking system was short-lived with markets pulling back from the highs in stock markets. It is a step but a baby one at best, and indicates there are more troubles ahead. Attention now will turn to Italy, the third largest economy in the EU. The bailout helped move Italy to the front line of the crisis, as bets increased Europe’s third largest economy may be the next one to succumb. Italy’s economy shrank 0.8% in the first three months of this year from the fourth quarter, confirming an initial estimate. Italy has 2 trillion euros of debt, more of a share of its economy than any advanced nation after Greece and Japan. Its Treasury has to sell more than 35 billion euros of bonds and bills per month to keep from defaulting.
Re-capping the reaction to the Spanish bailout, initially there was euphoria, the U.S. 10-Year Note last night hit 1.72% from its 1.64% close last Fridayand that lasted about a minute or so before it backed down. Europe’s stock markets are better but off their highs, the U.S. stock indexes are also off the best pre-opening levels at 930am. The Spain deal is a slight plus but not much and now the spotlight will also turn to Italy and of course the Greek election next Sunday.
At 930am the DJIA opened up +75, NASDAQ up +24; the 10-Year Note rate at 1.65% (+1 bps) with 30-Year mortgage prices down -4/32 (.12 bps).
Expect continued volatility today in the U.S. markets. This week Treasury will auction 3-Year Notes, 10-Year Notes and 30-Year Bond issues to borrow $66B, the same amount Treasury has gone for over the last few months. The economic data calendar has meat on the bone and will get attention but as long as Europe flounders the main emphasis will remain on what snippets and news comes from the region as it continues to drag down global economic outlooks. There isn’t any data out today.
