Spanish and Italian stocks are up 3% this week, European sovereign bond spreads are compressing like there's no tomorrow, and Europe's VIX is dropping rapidly. Why? Aside from being a 'Tuesday, we suspect two reasons. First, Hungary's decision to cut rates this morning is the 15th central bank rate cut in May so far which appears to be providing a very visible hand lift to risk assets globally (especially the most junky)' and second, Spain's deficit missed expectations this morning (surprise), worsening still from 2012 and looking set for a significant miss versus both EU expectations (and the phantasm of EU Treaty requirements). As the following chart shows, Spain is not Greece, it is considerably worse, and the worse it gets the closer the market believes we get to Draghi firing his albeit somewhat impotent OMT bazooka and reversing the ECB's balance sheet drag. Of course, direct monetization is all but present via the ECB collateral route and now the chatter is that ABS will see haircuts slashed to keep the spice flowing. What could possibly go wrong?
Equity markets are melting up...
[12]
The Hungarian National Bank became the 15th central bank to reduce the policy rate this month after Israel cut borrowing costs yesterday. Hungary cut the main rate by 25bps to 4.5%, having already lowered it by 100bps since the start of the year. As Bloomberg's Niraj Shah notes, the IMF has warned further cuts may weaken the forint and undermine financial stability.
[13]
Spanish Tax receipts and contributions to tax-funded welfare Social Security system through April fell 5.3%; and Interests paid by central govt to service debt rose 11.8% through April from year-earlier period. Spain may be the least likely of any EU country to bring its budget deficit below the region’s ceiling of 3 percent of GDP after the gap widened to 10.6 percent of GDP last year. The IMF forecasts the nation’s debt-to-GDP ratio will rise 7.6 percentage points this year and 5.8 points next year to 97.6 percent, the biggest increase in the euro area.
[14]
The European Commission may give Spain, Italy, France and Slovenia extra time to reduce their budget shortfalls tomorrow.
Charts: Bloomberg