MARKET WRAP – STOCKS GET CRUSHED
Stocks got hammered for 3.9% losses today as fears over Eurozone contagion continued to increase. From a technical perspective today was an utter debacle. 93% of all stocks were down at the NYSE, just 44 issues were higher, breadth was negative at 68:1, and volume was enormous. Credit markets were jittery all day as LIBOR/OIS jumped 8% and the TED Spread jumped almost 5%. The Euro actually managed to rally all day and finished with 1% gains. Rumors of continued government intervention in the forex markets resulted in huge intra-day moves in the Euro. The market is in a full on revolt against government intervention at this point as they have proven themselves entirely ignorant with regards to the situation.
This market certainly appears broken and it’s difficult to see what can fix it. The $1T bailout package has clearly been ruled a failure by markets. The next logical step is some form of EMU break-up (most likely partial with Greece leaving) or full unity (which is impossible as no nation will cede taxing power to a central authority). I’ve said for many months that this situation was uglier than market participants were assuming and I still see no good way out of this.
From Daily Futures:
U.S. Economy
The stock market is trading lower, blamed on the uncertainty of how Europe is changing the rules for its financial markets. The resulting liquidity crunch pressured most commodity prices.
The U.S. Labor Department said that jobless claims were up 25,000 last week to 471,000, more than expected. The June U.S. T-bonds closed up 1.08/32nds at 124.01/32nds.
The Conference Board’s index of leading indicators was down .1% in April, weaker than expected.
The Philadelphia Federal Reserve’s regional index of manufacturing increased from 20.2 to 21.4 in April, a little better than expected.
The Federal Deposit Insurance Corp. said that the number of troubled banks in the U.S. increased from 702 to 775 in the first quarter of 2010.
Grains and Cotton
The USDA said that, compared to the four-week average, last week’s net sales of:
Corn were up 1%.
Soybeans were up 100%.
Wheat were up 37%.
Cotton were up 2%.
July soybeans ended up 5.5 cents at $9.44.
Livestock
The USDA said that net sales of beef totaled 15,700 tons last week, down 2% from the four-week average. August cattle fell 1.05 to 90.47, pressured by the lower stock market and concerns about the larger economy.
Coffee
July coffee ended down .85 at $1.3165, pressured by concerns about Europe and talk of a larger coffee crop in Brazil this year.
Energies
The U.S. Department of Energy said that underground supplies of natural gas were up 76 billion cubic feet last week to 2.165 trillion cubic feet. Supplies are now up 4% from a year ago. July natural gas closed down 6.1 cents at $4.185.
July crude oil fell $1.68 to $70.80, hurt by today’s liquidity crunch and concerns that Europe’s problems will lead to a reduction in the world’s demand for oil.
Metals
Gold has been considered a safe haven from Europe’s problems lately, but August gold closed down $4.50 at $1,190.40 with investors favoring cash.
Currencies
Japan’s Cabinet Office said that real GDP was up 1.2% in the first quarter of 2010 and up 4.2% from a year ago, less than expected. The June yen closed up .0181 at 1.1106.
The Australian economy has been an impressive performer, but liquidation continues in the June Australian dollar, closing down 1.41 cents today at 82.55, the lowest close in eight months.
Statistics Canada said that its composite index of leading indicators was up .9% in April, the 11th consecutive increase. The June Canadian dollar dropped 1.54 cents to 93.90, the lowest close in three months.
The U.K.’s Office for National Statistics said that retail sales volumes were up .3% in April and up 1.8% from a year ago, a little more than expected.
The June euro jumped up 1.92 cents to $1.2568, helped by talk that Germany and France will work together to support the euro and the Euro zone.
Do you think the Euro would rise or fall on Greece and other PIIGS leaving?
Good question. My guess is EUR would spike, equity markets would get crushed. Anyone else have some thoughts here?
Why would equity markets get crushed?
Fears of contagion
Euro up since it would look more like the Deutschmark, Eqty down, especially banking sector
I’d have to imagine the Euro would spike, as it would essentially be far more Deutsche Marc like (assuming the PIIGS left).
As for equity markets; I think they’d be schizophrenic; I’d have to imagine PIIGS/Euro-area both down and the US being even more confused.
That said, I’d buy the crap out of De La Rue (in London) — someone has to print those new banknotes!
Separately; I think people are being optimistic that anyone (bar Germany) will leave the Euro; as a Brit, one of the things I disliked about it, was that it’s a political exercise not an economic one (else they’d have stuck to all those rigid Maastricht Treaty criteria, max 3% deficits, 60% Debt/GDP ratios, that were there to promote economic convergence). It was a big deal, nationally (in terms of sentiment/standing/etc) for the PIIGS to join.
As a political exercise, it requires political will for it to come apart or to kick people out I’m not sure anyone else can or is willing to. Germany’s the only country that can really choose walk away on its own.
Additionally, If I’m a Greek politician — I call Germany’s bluff.
I’d pretend to try and let some of the austerity kick-in (such that the deficit is smaller), wait for a govt collapse or new election.
Then say “we’re defaulting, deal with it suckers” rather than “we’re leaving the Euro”. Yes, all the structural problems remain for Greece but i) they just reduced their national debt (and don’t forget the interest component of their deficit just shrank) and ii) markets tend to forgive ridiculously quickly (see 2009 rally).
Would History judge me as a fool?
Probably, but people thought Volcker was the fool, and Greenspan the legend for decades. Hell, half the people still do!
And I’d sure be popular in Greece when I did it…remember the 30′s; austerity = unpopular, blaming others = popular.
Is Greece still structurally screwed?
Yes, but it’s not my problem it’s now a problem for the next guy as I bought some time.
What does the ECB/EU do? Same as they always do, talk a lot…kick it back to the individual countries to debate. It’s the problem of economic union without political union; there isn’t 1-decision maker and 1 consistent message!
Who’s going to vote to kick Greece out of the Euro? Spain, Portugal, Ireland or Italy are all going to veto it, they don’t want to be next.
That’s how politics works; Government’s are the worst short-term investors.
That’s why I am so negative. They won’t bite the bullet and agree to do what needs to be done. They will try to continue to salvage the Euro and it will continue to not work. There is no good solution here. It’s a total mess.
Absolutely; sorry some of my British dislike of Euro spilling out there
Hurrah for John Major, and the 1-thing (our Euro opt-out) he nailed as PM!
A brilliant move no doubt! Let’s hope Cameron doesn’t go on a deficit reduction campaign that drives the motherland into depression, but avoids (OH NO!) default. Ha.
A couple years of 20% unemployment, more debt, and a deflationary spiral will eventually cause the populace of the PIIGS to demand to leave the Euro. Or the German people will decide that enough is enough, and Germany will let them default. Neither will do the markets any good.
It seems everyone is holding cash waiting for tomorrow’s crash.
Even though it makes “sense”, bailing out of the eurozone by any major country would be a **complete** fiasco. With the uncertainty already created by EUR-USD and the USD liability side, they would be crazy to try to revalue assets on new currencies. Germany already has a lot of experience with the former East Germany and they will do the same with Greece. Frankfurters like banking and this is their chance to save their own ass and generate some fees; now they can have their dog and eat it hot too. Expect a special solidarity tax equal to 2-3% of GDP **euro wide** during the debt workout. Greece leaving would be ok, but definately not Spain. Too late. When W. Germany did this in the 90s, the world eonomy was pretty crappy except near 00 (remmeber the great 90 recession, the 94 bond debacle, 98 asian flu …). Germany also did this while France/Spain had double digit unemployment.
The only two potential problems will be: (a) capital flight (a lot of Germans moved into Swiss Francs during the 90s) … even more likely now that the ECB will have to QE, (b) trade war … the Great Moderation was due to free trade and US/UK ideaology to kill inflation by importing deflation from second/third world countries. Now they want inflation so the GM will go into reverse. China is toast. Greeks will now have to work til 70 like the rest of us (ok maybe not TPC) … heh maybe the Germans will exchange their Turks building Mercedes for good-blooded, blond, blue-eyed Greeks.
Of course, what happens to all the debt during cleanup is another problem, but by then they will just share the same problem with every other country in the world, but the Euro will be saved.
Nice analysis. The only thing you might be missing is the popular unrest that’s likely to take place across Southern Europe as it sinks into a debt deflationary spiral and in Germany due to the prospect of endless bailouts.
Trade Wars: I’m somewhat surprised (and pleased!) that none of the major blocs (US/China/Europe) have moved more aggressively on this front.
Maybe it’s still to come, when the domestic pressures/strife make it too tempting for the politicians, and we’ll have our own Kindleberger spiral!