Monday, July 11, 2011

Europe: Yellow Alert

Today was a bad day for European markets, particularly Italian. Italy's largest bank, UniCredit, fell off the cliff from the outset and the Italian stock market had to halt trading. It reopened a tad later, and investors welcomed this with another tsunami of sell orders. Italy's 2nd largest bank, Intesa San Paulo, fell 7% on the day. It was'nt just Italian banks, either. ING, a Dutch insurance giant, fell 10%. Deutsche Bank lost 6%. Barclays lost 6%. These are serious losses, folks. On most days, a stock will move perhaps 1% or even 2% if something big happened. It went downhill from there.

Later in the day, Germany's Chancellor Angela Merkel refused to expand the EFSF, the European fund they set up to bail out problem children like Greece. The EFSF is not anywhere close to being able to handle Italy. Another stake to the heart came from the ECB itself, which refused to purchase Italian or Spanish debt. It also appeared that the second Greek bailout was having problems. As a result, the government bonds of Spain, Italy and a whole host of other EU nations tanked, with Spain passing the important 6% level on the 10 Year bond and Italy's nearing this level. After the close of the markets, one of Spain's states-- Castilla La Mancha-- announced that their deficit was more than twice what they said it was. This was not the day for this to say the least.

As all of this was happening, the Euro currency itself began tanking, especially against the Swiss Franc {see above chart}. it lost two cents versus the Swissy-- this is a MAJOR move in a single day.

So, to recap: Big EU banks crashing, Gov't Bonds crashing, currency crashing. Tonite's action in the LIBOR and EURIBOR markets will be telling; if the rates soar as I expect, there is a fair chance we're watching the EU version of 2008 beginning. "We've painted ourselves into a corner. At some point, someone-- either Germany or the ECB-- must fundamentally shift position, or it all blows up" an EU official told Reuters. There is a chance all of this just blows over without any serious drama, but I highly doubt it. I'm thinking a very large bailout {or the EuroBond} is coming. If there is no bailout and things continue southward, the entire EU banking and financial system is in trouble.

update Tues 4pm: Well it seems that the "powers that be".. ie.. the People's Bank of China and the ECB.. rode in this morning on white horses and stopped the bleeding. UniCredit's stock ended the day up; Spanish and Italian Gov'tBond rates went down (after opening the morning very much higher). So much for that crisis. I'm honestly surprised at how quickly the bond vigilantes caved in. The PBoC is rumored to have tossed in a very large sum, which I believe to be the case given how drastic today's turnaround was.