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Publication date: 11 June 2012
Author: Mark Deans, Moneycorp
Markets reacting positively to Spain’s weekend bailout
A fashion has sprung up for the Anglo-Saxon world to blame Euroland’s financial crisis for all its ills. President Obama started it off, fancying that he had five months to persuade voters that Angela Merkel, not himself, carries the can for America’s slowing recovery. Chancellor of the Exchequer George Osborne jumped on the bandwagon in Saturday’s Daily Telegraph, writing that Britain’s recovery is being “killed” by the euro crisis. And Europe will inevitably be held responsible if England fails to beat France this evening in Donetsk.
But EU leaders are trying to put things right. They have agreed to a €100bn bailout for Spain so the government can patch up the country’s troubled banks. The money comes without the austerity strings attached to Ireland’s bailout but it is not clear whether the money will come from the European Financial Stability Facility or the new European Stability Mechanism. If the latter, the loans would take priority over existing and future Spanish government bonds and that relativity might make foreign investors even less inclined to buy Spanish debt than they are already. It would not deter Spanish banks though, and could reinforce the incestuous circle in which Madrid finances its support of the banks through their purchase of its bonds.
Prime Minister Mariano Rajoy hailed the agreement as a “victory” for the single currency. In the short term investor reaction has indeed been positive. But the euro can’t afford too many victories like that.
Investors spent Friday pondering the nature of the Spanish bailout. They grew steadily more confident that it would happen but could not guess what form it would take. The vague optimism sent the safe-haven US dollar and Japanese yen lower while equities, energy, commodities and commodity-related currencies gained ground. Sterling strengthened against the US dollar and yen and fell back elsewhere.
The Far East market had the first opportunity to react to the news from Madrid and it did exactly what could have been expected, buying the euro and commodity currencies, and selling the US dollar and yen. The euro gapped more than a cent higher against the dollar. As on Friday, sterling occupied the middle ground. It, too, gapped nearly a cent lower against the euro when Sydney opened but since then it has made back more than half that loss. Against the dollar sterling is a cent up from Friday’s opening level.
As well as the Spanish victory there was another boost to general investor confidence this morning when China reported unexpectedly healthy international trade data. May’s trade surplus was very similar to the previous month’s at US$18.7bn, but imports were up by 12.7% and exports by 15.3%. The news dispelled some of the concerns about the Chinese economy.
Due today are French industrial production and Italian first-quarter gross domestic product. The Italian GDP number would normally pass by almost unnoticed but there is such a dearth of data today that it will have nowhere to hide. A quarterly shrinkage of -0.8% in economic output is likely to be confirmed, with activity falling by -1.3% in the year to March.
So let’s see how London responds to the Spanish bailout. As in the Far East, the initial reaction ought to be positive. More difficult to guess is whether investors will see it as proof of EU leaders’ commitment or evidence of their fear.