ECONOMETER

There hasn’t been much of a respite before Eurozone concerns have resurfaced. Spain and Greece are once again in the spotlight, with the formal approval of a bank bailout for the former providing little solace as speculation of a full scale sovereign bailout grows. The fact that two Spanish regions have asked for government help, with more likely in the pipeline, has only acted to reinforce such concerns.

As for Greece, the halting of a bailout tranche due to failure to meet targets, the European Central Bank (ECB) decision not to accept Greek debt as collateral and the visit of the Troika (EC, ECB. IMF) will keep markets nervous as default fears intensify. Unsurprisingly Eurozone peripheral bond yield have come under renewed pressure while core Eurozone yields have turned negative in some cases.

Spanish yields have moved above the critical 7% threshold while the EUR has tanked versus USD and on the crosses as it increasingly takes on a funding currency role and makes its way towards the 1.20 level versus USD that I expect it to test soon.

Hopes of further monetary stimulus, especially in the US and China have provided some support to markets recently but the provision of drugs will not cure the patient this time around. Even relatively decent US corporate earnings, with around 2/3 of S&P earnings released beating admittedly lowered expectations so far, have failed to stop the rout.

Big cap defensive and high dividend companies have fared well, giving a degree of resilience to US equities which are up over 8% (S&P 500) this year, but with around 171 companies set to deliver results this week it is not clear that this will continue.

Weakening US data, with a deceleration in US Q2 GDP set to be revealed this week will provide more evidence that US economic momentum is slowing. Nonetheless, as long as US Fed quantitative easing is not an imminent prospect the USD will likely find plenty of support as risk aversion creeps back into the market psyche.