It's been six weeks since the EU Summit that apparently laid the foundation for all that is good in Europe to evolve. Between the EU Summit's euphoria-to-dysphoria flip-flop and Draghi's believe-to-deceive-to-promise roller-coaster, bond prices/yields and stock prices have had a wild ride - but there is a very clear disconnect now. Since 6/28, Spanish and Italian 10Y spreads are unchanged - yes the very instrument that is supposed to benefit from all this chin-wagging and jawboning has done nothing! Meanwhile - the previously synced at the hip equity markets of these two nations have soared - both now above immediate knee-jerk highs of the EU Summit. This leaves Italy's FTSEMIB almost 7% over-valued relative to its credit risk and Spain's IBEX around 6%; whether this is due to the short-sale ban or simply an irrational willful ignorance of fact over hope - we suggest the convergence offers some better hope (especially as Rajoy sees his party support waning).
Italy Bonds vs Stocks...
and Spain Bonds vs Stocks...
The Socialist opposition rejected an earlier agreement for a 100-billion-euros European rescue for Spanish banks and is also against a sovereign bailout, and there are now even voices against it within Rajoy's ruling People's Party (PP).
Privately, senior party members have begun to blame Rajoy - an unlikely crisis manager with a cautious demeanour - as Spain is dragged deeper into the 2-1/2-year-old euro zone debt debacle.
While Rajoy has an ample majority in Parliament that has not shown signs of breaking, PP leaders in the country's 17 autonomous regions have begun to rebel against tight spending controls that have forced them to cut back on hospitals and schools and face political backlash.
"We're united behind him but it is not wrong to say that there is a diversity of opinions which are now being expressed," a senior PP member told Reuters.
"In order to make it politically digestible, the request for EFSF/ESM aid might come together with a cabinet reshuffle," Citigroup said in a note to clients