The markets have been treading water over the past week, yet courtesy of the non-existent volume and the lack of sellers, VWAP algos have been levitating the S&P ever higher despite the lack of any new or credible reason for it to do so. Call it the Merkel vacation doldrums. It is so slow in Europe even Rajoy - now the gatekeeper for the next European phase of sovereign bailouts - is soaking in the sun somewhere, whether or not he may want to return to his job is another matter. As Reuters reports, his popularity is plummeting meaning the government will not survive if and when Rajoy demands a Spanish bailout: "Spanish Prime Minister Mariano Rajoy faces a cloudy return from his short summer break as his expected request for European aid in September will spur protests on the street and deepen cracks emerging in his conservative People's Party... According to an official poll released this week, if a general election were to take place now, Rajoy's People's Party would still win but would get only a 36.6 percent of the vote, down from 40.6 percent in a poll in May and 44.6 percent in the November vote." Which in turn means that Spain demanding a bailout could well mean a violent government overthrow and a follow through mimicking precisely what we saw in Greece, with the opposition party set to undo any bailout request by Rajoy (who knows all of this). In the meantime Bloomberg confirms that sentiment in Europe is resuming its turn as European markets fall led by the Spanish and Italian markets, 10yr yields in those countries rise. Chinese import & export data and French industrial production data were below estimates earlier. The euro is weaker against the dollar and commodity prices fall led by industrial metals. U.S. import price data is released later.
And once again, the primary catalyst of the sentiment shift is precisely what we warned about last week [6]- that the longer the market prices in a Spanish bailout request, the more unlikely it is to happen. One more bank who has realized this and jumped on the ZH bandwagon is UBS. Bloomberg summarizes its most recent note on the topic which is a replica of our post from the past weekend:
- Potential for “quite a large-scale selloff” in front end, and significant flattening of curve over next six weeks, as yields may have to rise before Spain requests aid, Justin Knight, head European rates strategist at UBS, writes in client note published Aug. 9.
- ECB bond-buying alongside EFSF/ESM can only happen once request made; request dependent on yields likely not to be based on short-end alone
- "Reasonable to believe" Spain would resist asking for aid until borrowing costs make it seem absolutely necessary, due to ECB conditions
- Spanish government needs to raise ~EU40b in bonds before year-end, implying issuance pace of about double that of year so far; sources of demand weak or non-existent
- Risk to view is that Spain may bow to any pressure from other authorities to request aid
Expect more and more to get it with the now traditional delay. Although not for a while as most decision-makers, clueless as they may be, are on vacation for 3 more weeks.
So sit back, and enjoy the directionless market, where corn today may hit a new all time record at 8:30 am with the release of the WASDE [7], with the resulting food price inflation making further easing, also priced in by the market, by most central banks impossible.