One word: Spain, and more specifically, 6.00%+. That's where Spanish 10 Year bond yields are again, with Spanish CDS soaring to a fresh all time wide of 512 bps (+13.5 bps), and the Spanish-Bund spread blowing out to the widest since November. And to think it was only two days ago that the schizo market interpreted Spain's bank sector nationalization as good news. It may be for the bank sector (for a few days at least), but it sure isn't for the sovereign which would end up onboarding on the risk. Naturally, 48 hours later the market has figured out this fine nuance and is dumping everything Spain related once again. That this is surprising is an overstatement: we have seen all of this before, only last time it was Greece. Hopefully the same playbook works for Spain, and works better. The result - redness everywhere, especially in the aftermath of an implosion, and halt, in Italy's oldest and one of its biggest banks (guess which PIIG is next on the nationalization bandwagon), after Italian prosecutors on Wednesday ordered searches at the headquarters of Banca Monte dei Paschi di Siena and its top shareholder in a probe over alleged market manipulation linked to Monte Paschi's 2007 purchase of smaller peer Antonveneta. From Reuters [18]: "Prosecutors in Siena, where Monte dei Paschi is based, said in a statement the offices of several Italian and foreign financial institutions based in Italy were also being searched by financial police as well as private homes, without elaborating. They said the searches were part of an investigation into possible market manipulation and obstructing the work of regulators with regard to raising the funds to buy Antonveneta." But probably the worst news comes from Bank of America which summarizes the Greek situation as follows: "If another election takes place, as seems very likely, Syriza could win. Their populist rhetoric is gaining momentum in Greece. Moreover, left voters from the Communist Party of Greece and Democratic Left are likely to vote for Syriza given its chance to win." Which naturally, is Europe's biggest nightmare. Sorry to say, but Europe appears very much unfixed and is about to break even more.
Full overnight report from BofA:
Market action
The sell off in equities continued as political tension in Greece heightened concerns that Europe's debt crisis may worsen, weakening the outlook for exporters in Asia. That sent Asian markets in the red with the lead taken by the Shanghai Composite which closed 1.7% lower. The Japanese Nikkei ended 1.5% down, the Korean Kospi lost 0.9% and the Hang Seng shed 0.8%. Meanwhile, the Indian markets followed the rest of the region lower with the Sensex trading lower by 0.4%.
Weakened by the political uncertainty in Greece, European equities are trading down 0.6%. As we note in more detail on page two, the left party Syriza will try to form a coalition government today. We do not expect them to succeed, as only the Democratic Left has so far agreed to support them. The region's blue chips are underperforming the broader market down 0.7%. Shares listed in London are down 0.4%, down 0.6% in France while shares listed on the German DAX are up 0.1%.
At home, S&P closed 0.6% lower yesterday, with the futures indicating a lower opening today as well. In bondland, US treasuries are bid with the 10-year yield down 2bp to 1.82% while in Europe the Italian 10-year is trading at 5.51% after rising 9bp and Spain's 10-year note is currently 5.96% after jumping 17.4bp.
The dollar has strengthened by 0.2% against the major currencies on safe-haven demand. In commodities space, crude is lower by 0.6% to $96.42 while gold has fallen further by 1.3% to $1584.62.
Overseas data wrap-up
Exports from Germany unexpectedly rose 0.9% mom in March. Consensus was looking for a decline of 0.5% mom in today's report. Today's increase marks the third consecutive increase and puts first quarter exports 2.7% above the fourth quarter level. German exports continue to remain a bright spot in the Euro area as the country benefits from strong demand from emerging markets.
Greece update
- Left party Syriza will try to form a coalition government today. We do not expect them to succeed, as only the Democratic Left has so far agreed to support them. Moreover, the two main parties (New Democracy and PASOK) strongly disagree with Syriza's call to stop the current program, stop paying Greece's debt, not to implement the envisioned austerity measures, take back labor market reforms already implemented, and nationalize banks.
- Reports in Greece suggest that head of PASOK Mr. Venizelos will not try to form a coalition government if Syriza fails. This means that the next step is a meeting with all political leaders with the President Papoulias, most likely this week, in a last effort for a coalition government. If this fails, another election on June 10 or 17 appears inevitable.
- If another election takes place, as seems very likely, Syriza could win. Their populist rhetoric is gaining momentum in Greece. Moreover, left voters from the Communist Party of Greece and Democratic Left are likely to vote for Syriza given its chance to win. In this case, either Syriza will form a left coalition government after the elections, or Greece will need another election again if no government is formed. Clearly, very negative scenarios.
- What can go right? A strong message from the rest of the euro area, particularly from France, that the next election is effectively a referendum on the euro could help focus minds in Greece. Also, small parties that support the program but did not reach the required threshold to elect parliamentarians in the elections are discussing plans to merge. This could increase the chances of a coalition in support of the program. Finally, part of the 35% percent of the population that did not vote last Sunday could vote this time, leading to a different outcome. However, it is not clear how they might vote.
Today's events
At 10:00 am, wholesale inventories for March are released. Consensus is looking for a 0.6% mom increase in inventories that's down from the 0.9% mom pace recorded in February.