Spexit, Grexit or Both?
The Eurozone thriller took another twist. Observers thought there would be a little time to breathe before the next turn – a Greek exit (“Grexit”) from the shared currency. Now, with Spain running out of options, it looks like “Spexit” may happen first.
The impending collapse of major Spanish lender Bankia is forcing Euro leaders to make decisions they had hoped to postpone. Spain’s economy is twice the combined size of previous bailout recipients Greece, Italy, and Ireland. Even if Germany and other wealthy nations have the means to save Spain – which is far from certain – the conditions of any rescue may not be acceptable to a restive Spanish populace.
Spexit also makes sense because Spain is far more prepared than Greece to stand alone without Europe. Much like the U.K., Spain (and Portugal) have deep ties to their former colonies around the world. A coordinated split – with Spain, Greece, and maybe others leaving the Union at the same time – could be in the cards. Grexit will not happen until after the June 17 Greek elections. If so, the goal for now is to just keep Spain afloat for another month or two.
Traders are not waiting for official word. Capital is leaving Spain at a furious rate, and apparently headed to Germany and the U.S. German two-year government bond yields dropped to zero today. The U.S. ten-year yield dropped to a record low – down to 1.63% – while the greenback rallied for a fifth straight week.
As if all the above were not interesting enough, this holiday-shortened week will end with a summer blizzard of economic data. Thursday brings the ADP employment report, initial jobless claims, and the first revision of Q1 U.S. GDP. Then Friday comes the big kahuna: the May monthly jobs report. Analysts expect to see 150,000 new nonfarm jobs and an unemployment rate holding steady at 8.1%.
With expectations for the jobs report almost uniformly bearish, any surprises could move markets quickly. So could any hopeful actions in Europe. Much is happening behind the scenes this week. Thrill-seeking investors have rarely had it so good.
If you want to see upward movement, the Sector Edge chart is the only place you will find it today. The defensive trio – Utilities, Consumer Staples, and Health Care – holds a momentum monopoly across every category we track. The top three are in the same order as last week. In fact, the relative order of all ten Sector categories is unchanged since our last report. We did see a little internal movement, however. Consumer Discretionary closed much of the gap with Telecom. Industrials increased its lead over Technology, which is now in a virtual tie with Financials. Materials still lagged. Sub-$88 crude oil prices are keeping Energy in last place.
If a picture is worth a thousand words, a quick glance at the Style rankings says more than anything we can write. Every category is negative in a very tight range that makes distinctions difficult. In these circumstances, relative order means little. The negative tilt, while fairly mild, suggests caution is the best course. The capitalization order we noted last week is still mostly intact. Large Cap Growth and Mega Cap swapped places at the top, while Micro Cap and Small Cap Growth share the basement. Large Cap Value is a discrepancy, well behind its like-size peers.
A strong greenback helped the U.S. widen its lead on other regions. We continue to see a significant fall-off in momentum between the U.S. and second-ranked World Equity. Third place United Kingdom held its spot, but Canada is rising fast. We are not quite sure how to explain Canadian markets this year. In an economy highly dependent on Energy and Materials, strength and weakness in those sectors seems to have little influence on the stock market. Currency strength against the Euro is part of the answer, but mystery still remains. China has been volatile as hopes for additional government stimulus rise and fall. The EU, not surprisingly, fell back to the #10 position as conditions worsened for Spain, Greece, and Italy. Latin America stayed in last place.
“Spain looks to have gotten to the point where it cannot bear the burden alone. The Spanish government recognizes the need for burden sharing, but it does not want the kind of burden sharing that was made available to Greece, Ireland and Portugal.”
David Mackie, chief economist at JPMorgan Chase, May 30, 2012
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