When is a bailout not a bailout?
When you get the central bank to take all your debt on board and give you unlimited liquidity in return. Markets are breathing a sigh of relief that if the bailout deal with the ECB goes through then the country will not have to tap the markets for more funds to prop up its ailing banking sector. This unorthodox attempt to place a firewall around Bankia is another sticky plaster that Europe has been putting on the wounds for the last few years in order to stop the haemorrhaging, and for now investors seem to like the idea. The problem is what sort of precedent this sets for other countries whose banks are in similar trouble. The rule book is being well and truly ignored in a bid to save the eurozone from collapse but meanwhile many are preparing themselves for what they believe to be an inevitable breakup of the single currency.
Spare a thought for Ireland as they sit out on the far westerly part of the eurozone and have been taking their bitter medicine in order to get their house back in order, whilst at the same time having a spectator’s view of other countries that seem to be getting very much preferential treatment. Greece has much of its debt written off and now Spain is seeing one of its biggest banks guaranteed by the ECB.
Yesterday the FTSE hardly changed amid low volumes closing at 5356 as investors were awaiting further developments from the euro area. Besides the public holidays for a number of European exchanges and the US it was the ongoing uncertainty regarding Greek elections that kept participants on the sidelines. After all, there is widely agreed to be significant downside risks for the UK economy given its potential domino effect.
This morning European indices are back at the highs they rejected in yesterday’s session with the FTSE knocking on the door of 5400 again. Despite Spanish 10 year bond yields continuing to hover around 6.5% the bulls seem to be in control for now as they are buoyed by the deal between Spain and the ECB. Clients bought into yesterday’s reversal and must be happy to see the little rally so far this morning. The test though is the near term resistance at 5400 and just above. Beyond there the next near term resistance level for the bulls is seen at 5580.
The major highlight on the economic data front today is US consumer confidence which is expected to tick higher as petrol prices across the pond have declined a little, but this sentiment could be reversed by the recent fall in equity markets.
Breaking news that a pro-bailout coalition in Greece is gathering momentum sparked an early rally in the euro versus the US dollar. However, growing concerns over the Spanish banking system discarded that initial optimism, adding renewed downside pressure on the shared currency. In the end the EUR/USD pair closed at 1.2539 and at the time of writing it is just benefiting from the lift that equities are getting as it trades at 1.2560.
Gold finished near flat at $1574.4 yesterday amid a tight range as investors were reluctant to commit too much ahead of the nonfarm payrolls figures due this Friday. Although the precious metal seemed to have stabilised in the last two weeks or so after falling from around $1670 since early May, it still did not give buyers a convincing reason to step in. Buying on the dips seems to remain limited so far.
Stocks provided very limited direction for the energy sector so the WTI crude prices enjoyed a brief rebound driven by a higher euro. Brief indeed because fears over the Spanish debt gave the dollar the driving seat which in turn pushed the WTI back down. Albeit a thin trading range, the session ended 25 cents up at $91.11, but it’s too early to say if the bearish momentum eased.