Spain is Fixed! Again! Maybe
Rajoy announces a new Spanish budget. Rajoy asks the ECB to enact OMT. The IMF agrees that the new budget is enough and ensure that OMT is enacted and that ESM can buy new issues while they are at it.
All is good, right? Not so fast.
A couple of weeks ago, I would have agreed that these steps would have been enough to continue the rally. This morning, while these alleged steps are helping prop up asset prices again, I doubt it will last.
Currently IG19 CDS already 2 bps tighter, and MAIN in Europe 4 bps tighter, Spanish 5 year bond yields at 12 bps better and S&P futures are up a healthy 8 points. What’s not to like?
There are several things that I don’t like, and think have changed over the past few weeks. There is mounting political pressure against bailouts. The pressure can be found in all the countries. In countries providing the money there is growing opposition to the bailouts. In countries getting the bailouts, there is growing opposition to the terms required. This is not good for continued success.
So with a backdrop of ever increasing opposition, the fact that bailout will come not just with conditions, but conditions that have to be met regularly to continue to receive aid, the OMT is unlikely to last for long.
The entire EU has provided absolutely no evidence that they can deal with the economies. The money that will be made available will be just enough to keep going, while the austerity has the risk of crippling the economy further. Banks won’t be fixed to the point that they can lend again, they will be fixed just enough so that if all goes swimmingly well for awhile, they might not need more money in the future.
So any excitement by some agreement is likely to be very short lived, and may well already be priced in. Remember, we are getting ever closer to earnings season, and there is every indication that earnings won’t be great and even more importantly, that the outlooks will be weak.
I remain very cautious about markets here and do not expect this Spanish Budget rally to last.