Greece and Spain Compete for Limelight

Spain is giving Greece a run for its money in terms of who can generate the most stress.  Recent polls suggest that the New Democracy and PASOK can lead the next government in Greece  Greek bonds are slightly firmer on the day.  Spain's support for Bankia raises more questions than it solves and Spanish bonds continue to trade heavily and Spanish stocks are down almost 2% with financials down even more near midday in London.  

Spain appears to be proposing that the government injects 19 bln euros into Bankia via a bond issuance.  Bankia can then take those bonds to the ECB for cash.  While the ELA facility has received much attention recently as a less obvious way banks are receiving assistance (especially in Greece as the bank recapitalization process continues), Spain's proposal is arguably more significant.  Spain's government would determine the extent of the money creation, while ELA requires in most cases ECB approval.  

We have suggested three no's characterize the investment climate in Europe: no ECB backstop for sovereigns (11 weeks now and now SMP); no collectively bond and no EMU break up.  Spain's PM Rajay has his own three no's:  no bank failures; no region failure; no  assistance needed.   The Center for European Policy Studies estimate that bank losses in Spain could be as much as 270 bln euros.  The government fund for this FROB (Fund for Orderly Bank Restructuring) has about 5.3 bln euros.  Moreover, by most estimates the correction in property prices still has more room to run.  

Between Spain's banks and regions, the challenges are significant, but add on top of that the state of the economy, recession and high unemployment, and the problems seem overwhelming.  Earlier today Spain reported a 9.8% fall in nominal retail sales in April from year ago levels (compared with a revised 3.8% decline in March).  When adjusted for prices, retail sales were off a whopping 11.3%.  

The euro continues to hold above the $1.25 level.  Although it was briefly taken out last week, it seemed once the barrier was taken out there was not much follow through and it snapped back.  The speed at which the euro came back off from the $1.2625 high yesterday indicates the bias remains sell into bounces.   The choppy consolidative phase the emerged at the end of last week is continuing today.  

The fundamental news stream for Europe remains poor, but there are many who think this week's US data will strengthen the case for QE3 later this month.  Today's data includes Case-Shiller house prices.  Prices like activity appear to be stabilizing albeit at low levels.  Last week's Univ of Michigan consumer confidence, which rose to new recovery highs, probably stole the thunder from today's Conference Board measure.  The drop in gasoline prices is the one factor that helps account for improved confidence.  Lastly, the Dallas Fed manufacturing survey may be of interest ahead of the national report.  Regional Fed surveys have been mixed but generally softer. 

The UK reports better than expected CBI May/June distributive trade figures.  The headline balance rose to 21 from 6 and the expectations for June rose to 24 from 19.  Both were a little above expectations and are the strongest since April 2011.   Sterling itself is little changed on the day.  The $1.5720 area capped sterling yesterday and today.    There is some risk that a new round of asset purchases is announced next month and this CBI data does not stand in the way.  

Earlier Japan reported disappointing data itself.  The unemployment rate ticked up to 4.6% from 4.5%, even as the job-to-applicant ratio increased to 0.79 from 0.76.  Retail sales in April slipped 0.3% instead of rise by 0.1% as the consensus forecast.  The dollar is trading within yesterday's narrow range against the yen.  Today's range is less than a quarter of a yen.  

The important impulse from Asia is whether China is planning on the $300 bln fiscal stimulus as some press reports indicates.  Other reports carry denials.  Chinese stocks rose to 2-week highs in anticipation.