By Greg Peel
The Dow closed down 138 points or 1.1% while the S&P lost 1.6% to 1313 and the Nasdaq plunged 2.0%.
Greek Cyprus has asked for a bail-out. Never quite on the international radar, Cyprus could be considered part of the Greek bail-out given the E6bn or so required to save Cypriot banks stems largely from investment in Greek bonds. Cyprus becomes another victim, but not exactly substantial when we consider last night's real victim.
When the yield on the Spanish ten-year bond crossed 7.25% a couple of weeks ago, EU officials were proactive ? for once ? and set aside a line of credit from the EFSF/ESM of E100bn for use by Spain's banks if needed. While the bond yield fell back closer to 6% as a result, the response was not well accepted in international markets. It does not represent a capital injection, it simply represents piling more debt on top of excessive existing debt.
An independent audit of Spanish banks subsequently decided the banks would need E62bn of funding ? short of the E100bn earmarked. This seemed like good news, but last night the Spanish government made it official and formally requested a bail-out from the EU. There was no detail provided as to exactly how much Spain feels it really needs in rescue funds.
They called them the PIIGS back in 2010 when Greece bit the dust. Two years later only one of the PIIGS remains standing.
The timing of the Spanish request has likely been driven by the EU summit ? yet another summit to end all summits ? beginning on Thursday. The main topic of discussion will be how to orchestrate a plan that will satisfy both camps. Germany, which as the ultimate paymaster, remains committed to austerity measures across the eurozone, but has been forced to bow to weight of zone-wide pressure, while the rest of the members, led by France, are looking to provide some form of economic stimulus within frugal budget management. On the one hand we have chalk and on the other cheese. Talks of greater fiscal union and a banking union is all well and good, but they would take years to achieve. Meanwhile Spain is rather indicating to Germany that austerity is not working, in case Greece hadn't already.
Speaking of Greece, the Greek finance minister has resigned. One week of new government and ill health has forced the minister's hand. The new prime minister is also recovering from an eye operation so he won't be attending the summit either. Another representative will wave the flag.
In the US, sales of new homes popped 7.6% in the warm spring weather of May to be at a two-year high. Sales are 19.8% above a year ago, but still well short of pre-GFC numbers. US housing data has been rather skittish of late, but this should have been welcome news last night, were it not for European stock markets having been crunched ahead of the opening bell in New York. London was down 1.1%, Germany 2.1% and France 2.4%.
Wall Street subsequently plunged from the bell, and by midday was down some 182 points in the Dow. A gradual but unconvincing rally took us through the closing bell. It was another classic risk-off and flight to safety session.
The US dollar index rose 0.3% to 82.48 as the euro fell, yet gold climbed back US$12.00 to US$1584.30/oz under the influence of buying beyond the US. The US ten-year bond yield fell 6bps to 1.61% and the German equivalent was heavily sought after, while the VIX volatility index jumped 12.5% to just over 20. The Aussie lost half a cent to US$1.0010.
While it was a big move for the VIX, by rights the reading should be much higher than 20 at present if the previous few years are anything to go by. The lack of put protection demand is merely a reflection of the lack of equity positions in the market, but it does mean protection can be acquired cheaply both in the US and in Australia.
Commodities had a much quieter session, with base metals mixed on small moves, Brent crude was little changed at US$91.01/bbl and West Texas was off US48c to US$79.26/bbl. The fall in West Texas below 80 is nevertheless interesting, as it has long been a line in the sand for the Saudis. Below US$80 OPEC tends to start looking at production cuts.
The local market had a weak session yesterday, and the SPI Overnight is down 34 points or 0.9%.
It was always going to be a rock and roll week even without Spain's request. It is the end of the quarter and of the half in both the US and Australia and the end of the financial year in Australia. Window dressing is one consideration and locally, tax selling is another. Yesterday indicated some local companies are keen to get their guidance downgrades out of the way. There will no doubt be further chatter ahead of the EU summit beginning Thursday. If anything of note actually comes from the summit, Australia will probably have closed the books on Friday before it is known.