Spain’s Woes Fuel U.S. Stock Slide

Posted on | July 23, 2012 | 13 Comments

After opening down more than 200 points today, the Dow Jones Industrial Average has now stabilized at around 12,700 — about 130 points down — as of 1 p.m. Eastern. The Dow has lost more than 500 points since its May peak of 13,279, and the ongoing European debt crisis is to blame:

Fresh crises in Spain and Greece weighed heavily on markets this morning, sending stocks sharply lower and raising borrowing costs across Europe to levels seen as unsustainable.
In Spain, Catalonia was the latest of up to six regions in the country that say they may need aid from the central government, prompting speculation that Spain would need a full bailout.

The Eurozone crisis is, to some extent, a good-new/bad-news scenario for U.S. stocks. The bad news is that the instability and uncertainty undermine investor confidence, and portends the chance of another international bank crisis. The good news is that Europe’s problems make U.S. stocks a sort of safe haven as investors flee endangered European markets.

Overall, the situation in Greece and Spain is a net negative for Wall Street, but it does create a limited amount of upside opportunity.

UPDATE: The Associated Press:

Fear that Spain may need a government bailout sent its borrowing costs soaring, the euro to a two-year low against the dollar and stocks around the world sharply lower as investors pulled back Monday from all manner of risk. . . .
Borrowing costs rose sharply for Spain and Italy after news the Spanish economy contracted by a quarterly rate of 0.4 percent in the second quarter. Falling economic output makes it more difficult for Spain to deal with its debts. . . .
Bank stocks, which tend to take a hit when fear flares in Europe, were among the biggest losers. Citigroup stock dropped more than 2 percent and Bank of America 1.3 percent.
There were also signs that a global economic slowdown is hitting U.S. companies that rode out the recession fairly well, largely because currencies overseas have tumbled against the dollar.

Gold prices were actually down about $5 to $1,577 an ounce as of 1 p.m. Eastern, but if worries about the Eurozone continue to escalate, it would be reasonable to expect gold to go up.

UPDATE II: More explanation on Spain’s problems:

Financial pressure is mounting on Spain as its economy shrinks and the cost of bailing out banks and regional governments grows. Investors pushed the country’s borrowing rates to alarming heights Monday amid concern the government could be overwhelmed by debt and forced to seek an international bailout.
The interest rate, or yield, on Spain’s 10-year bond spiked 0.22 percentage points to 7.45 percent. That is the highest level since the euro began in 1999 and is considered unsustainable for more than a few months. . . .
If those borrowing rates do not fall back, the central government may end up being locked out of international markets and be forced to seek a financial rescue, like Greece, Ireland and Portugal.
“The higher the yield goes, the more untenable the situation becomes,” said Rebecca O’Keeffe, head of investment at Interactive Investment.
Spain is the fourth-largest economy in the eurozone, bigger than Greece, Ireland and Portugal combined.

The moral of the story is simple: In the long run, you can’t fool the market.

UPDATE III: Also, in the long run, you can’t fool voters:

A new poll from The Hill shows that two-thirds of likely voters blame bad economic policy for the current state of the economy — and more blame Obama than anyone else . . .

Well, duh. Bad economic policy causes a bad economy. Americans can look at the situation in Europe and figure out who it is that has been implementing European-style economic policies in this country. Are we headed into another recession? As Ed Morrissey points out, for many Americans the last recession never ended.

Category: Economics, Spain

Comments

13 Responses to “Spain’s Woes Fuel U.S. Stock Slide”

Wombat_socho
July 23rd, 2012 @ 1:16 pm

I don’t know that Wall Street will be as attractive as T-bonds. If those aren’t paying negative interest yet, it won’t be long before they are, since the demand is so huge.
Evi L. Bloggerlady
July 23rd, 2012 @ 1:47 pm

It is not just Spain and there are not enough Euros in Germany to bail out all of Southern Europe…
Dai Alanye
July 23rd, 2012 @ 1:56 pm

Don’t give all the credit to Europe. Save some for Joe Obamageithnerbernanke.

As for gold, the main question is why it isn’t already much higher, considering not only current inflation but the potential for far greater inflation.
Adjoran
July 23rd, 2012 @ 2:16 pm

As I mentioned when we had news of the 100-billion euro bailout a couple of weeks ago, that was just for the Spanish banks and didn’t include the state. Spain was already in recession and the additional austerity measures are only going to feed the contraction and make it even harder to find revenue, making matters worse. I suggest the EU adopt a new anthem, perhaps something by Ms. Carole King:

“It’s too late, baby, now it’s too late, though we really did try to make it.”

And Greece? Fuggeddabouddit.

Gold’s run up to $1925 was driven by speculation and R.S. McCain’s frantic cheerleading, but mostly by speculation. It’s not going back up as the dollar regains some strength.

Ah, yes, zero interest and gummint stimulus, the tried and true Bank of Japan policy that forestalled any growth for a decade. It’s like tuning in to an “Oldies But Goodies” radio station.

As the policymakers survey the wasted landscape of the once-verdant valley they have destroyed, will any of them remember they were only trying to pull a few weeds when it all started?
robertstacymccain
July 23rd, 2012 @ 2:24 pm

Gold’s run up to $1925 was driven by speculation and R.S. McCain’s frantic cheerleading, but mostly by speculation.

Ace should collect a royalty on jokes like that.
Adjoran
July 23rd, 2012 @ 3:00 pm

Ha! Like he didn’t steal it from someone else.
Adjoran
July 23rd, 2012 @ 3:17 pm

What is absolutely shocking is that none of the Euro-geniuses could see this train coming down the track at them, despite the rail being flat and straight and visibility unobstructed. It’s been impossible to miss.

Spain was already contracting – in recession – before these latest
crises hit. How did anyone expect them to raise revenue? Win the lottery? And were international bond investors going to ignore the fact that they were buying bonds in an essentially bankrupt enterprise?

Of course Spain has to borrow more, of course it will cost them dearly, of course a deepening recession is only going to make their banking sector sicker.

The EU operates much like the Steve Martin SNL skit about the medieval barber whose treatment for any ailment, including blood loss, is blood-letting. They will kill all their patients before they ever admit the whole idea was grandiose and stupid.
crosspatch
July 23rd, 2012 @ 3:28 pm

” Gold prices were actually down about $5 to $1,577 an ounce as of 1 p.m.”

If we start into a deflationary spiral as happened in the Great Depression, we will see the price of gold drop. Another indication that this may be happening is negative interest rates on French sovereign debt. Declining gold, negative interest rates, loss of value of all tangibles, is devastating. At that point the only place to put your money that holds its value is under the mattress. Once people start doing that, the economy goes from swirling around to bowl to going directly down the sewer.
Evi L. Bloggerlady
July 23rd, 2012 @ 3:43 pm

They all knew this was coming and they all know worse is on its way in the future. Heck, Zero Hedge has been noting this for months. But de Nile is not just a river in Egypt.
scarymatt
July 23rd, 2012 @ 3:56 pm

What inflation?

OK, that’s not comprehensive, but the CPI for July says, “Over the last 12 months, the all items index increased 1.7 percent before seasonal adjustment.”
Not to say that they shouldn’t and won’t, but the presses don’t seem to have created much in the way of price or wage inflation, and the price of gold apparently agrees with that.
Adjoran
July 23rd, 2012 @ 5:53 pm

Oh, it’s there, but it stays in the closet of the FRB storeroom, where they are kept out of circulation until necessary. And believe it or not, it could prove a good tool to have if we suddenly get sucked into a vortex of deflation, which is not so inconceivable as it once seemed.
Adjoran
July 23rd, 2012 @ 5:55 pm

Just so – which is why the FRB always has a target of low inflation instead of absolute stability. The economy can absorb 2% inflation or even a bit more by adjusting, the damage is real but can be dealt with. 2% deflation puts the brakes on everything.
Quartermaster
July 23rd, 2012 @ 6:33 pm

We’re not in recession and haven’t been for some time now. Depression yes, but not a recession.