Equities traded higher today, with US and Canadian markets rallying on news that China might undertake meaningful fiscal stimulus. While industrial metals stocks rallied with the base metals complex, gold stocks fell by 2.4% and gold fell 1.7%. Industrial companies led the way in the US, with the Industrial Engineering subsector appreciating 1.9% while the S&P 500 was up by 0.87%. In short, the ‘China trade’ was in full swing today at least as far as equity markets in Canada and the US was concerned.
While stocks were up, the US dollar was not down: the US dollar index is now trading at its highest level since last September. The Euro broke below the 1.25 EURUSD level mid-day and stayed there for most of the afternoon before rallying back to the 1.25 level at the close. EURUSD continues to make new intraday lows for 2012. What was the catalyst today? As though fears of a political conflagration in Greece following the June 17 election – and a possible withdrawal from the Euro – were not enough, Spain’s banking system continues to send off alarming signals. Markets are coming to terms with the difficulties involved in Spain’s bailout of its financial sector: the capital demands for the bailout of a single large bank, itself the result of a merger of numerous failed smaller banks, are significant (estimated at €19bn – that’s 1.7% of Spain’s 2011 nominal GDP).
Moreover, the capital injection is required at a time during which Spain is, to quote Spain’s Prime Minister Mariano Rajoy, “finding it very difficult to finance itself.” The Spanish yield curve flattened today, with yields in the 2-year through 5-year sector rising by approximately 5bps while the long end of the curve was up more moderately. Spain’s benchmark IBEX index declined even as most other indices were up, and its financials subsector shed 2.98% today.
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EURUSD (1.24.69) The euro fell, nearing a recent two-year low on Wednesday, hurt by worries about Spain’s soaring borrowing costs and expectations that more spending may be needed to support its ailing banks.
The 10-year Spanish government bond yield hit a fresh six-month high on Tuesday, with the sell-off in the country’s debt having driven up their risk premium over safe haven German Bunds to euro-era highs this week It’s as if everything starts and ends with Spain. Everyone is talking about Spain, putting Greece’s problems on the back burner.
The Great British Pound
GBPUSD (1.5615) Sterling was steady on Tuesday, staying vulnerable against the dollar as worries about Spain’s fragile banking sector kept investors nervous of taking on risk.
It remained supported against the euro, not far from its recent 3-1/2 year high due to inflows from investors seeking safety from problems in the euro zone.
But gains could run out of steam if expectations grow that the Bank of England may have to ease monetary policy to support a floundering economy.
The pound barely reacted to a survey unexpectedly showing British retail sales jumped in May, with last week’s data showing the UK economy contracted more than previously estimated in the first quarter still weighing on sentiment.
Asian –Pacific Currency
USDJPY (79.46) The euro fell to as low as $1.24572 on trading platform EBS, its lowest level since July 2010. The single currency was last down 0.3 percent from late U.S. trade on Tuesday at $1.2467.
Against the yen, the euro dipped 0.4 percent to 99.03 yen , nearing a four-month low of 98.942 yen hit on Tuesday.
Gold (1549.65) edged down on Wednesday as investors continued to fret about the euro zone debt crisis with Spain’s borrowing costs spiraling towards unsustainable levels, keeping the euro close to its lowest level in nearly two years.
Crude Oil (90.36) Oil prices fell today on Spain’s debt and banking woes, while losses were capped by the prospect of a disruption to Middle East supplies caused by tensions over Iran, traders said. New York’s main contract, West Texas Intermediate crude for delivery in July dropped 18 cents at USD 90.68 a barrel.
Iran and world powers agreed to meet again next month to try to ease the long standoff over its nuclear work despite achieving scant progress at talks in Baghdad towards resolving the main sticking points of their dispute.
At its heart is Iran’s insistence on right to enrich uranium and that economic sanction should be lifted before it shelves activities that could lead to its achieving the capability to develop nuclear weapons.