Last Monday, the Spanish bank bailout energized Asian stocks to start the week with a greater than 2% gain. Stocks in Europe and the U.S. chimed in to start the day, but by the close in Europe, the party was already over. Skepticism reigned as the 10-year government bond rate for Italy rose above the magic 6% level and for Spain rose nearly 5% to end the day over 6.5%. On the surface, that might be puzzling given that the EU had just agreed to give Spain 100 billion euros to bail out its banks. Perhaps some classic thinking regarding the lunacy of the Spanish bank bailout sunk in. Whatever the cause, U.S. stocks retreated, closing down 1.25% on light volume. Fear spiked upward 16.7% on the VXO, reclaiming about half of the loss sustained this past week. Three Federal Reserve presidents spoke—adding insult to injury.
Tuesday, Asia gave back some of Monday’s gains, but recovered gradually through the day to close down by only about 0.5%. Europe traded flat most of the day but did manage to close up slightly. Fitch downgraded 18 Spanish banks, catapulting its 10-year bond rate to over 6.7%. Italy’s moved to 6.17%. Despite this news, U.S. stocks shot up to close up about 1.25% on light volume in part in reaction to Federal Reserve dove Evans’ remarks that he supports stimulating the economy—more false hope. The fear gage moved down more than 6% while 10-Year U.S. Treasury Bond rates moved up to 1.66.
Wednesday, stocks in Asia gained 1%. Europe closed flat. U.S. stocks tried to hold it together, but by mid-afternoon succumbed to selling pressure and closed down 0.7% on light volume. Italian and Spanish 10-year bond rates continued their relentless march to the sky closing at 6.22% and 6.75% respectively. The VXO fear gage shot up nearly 9% to close at 24 while 10-Year U.S Treasury Bond rates settled back to 1.60%. After the close, Moody’s downgraded Spanish bonds three notches.
Thursday, Asia again retreated. This time the drop was about 0.5%. Europe had another flat day. In the U.S., we had another bad-news-is-good-news day. “Things are getting so bad in Europe, the central banks will have to do something.” “With such a bleak jobs and growth picture, the FOMC certainly will ease again.” The mantra of the hope mongers drones on. It’s all fantasy. Driven by this kind of thinking, stocks in the U.S. gained about 1% on light volume.
Stocks in Asia, Europe, and the U.S. gained about 1% Friday on hope that either Greece will vote for parties that support staying with the euro or the central banks will stabilize markets if not. I don’t know about you, but I’m growing pretty weary of this incessant talk that the “Fed (or central banks) stand ready to step in” and solve the next crisis. It’s particularly nauseating when we recall this amounts to bailing out banks with taxpayer money and papering over solvency problems by adding more debt. The gain for the day in U.S. stocks was on strong volume. It was options expiration day though which does bump up trading. Note too the 10-Year U.S. Treasury Bond rate fell 1.5% to 1.59. How does that happen on an up day for stocks? Thank artificial demand from Operation Twist vying for the $34 billion U.S. Treasury Bond offering.
Fear as measured by the VXO dropped to the 20 level—close to where it was to start the week. AAII sentiment moved to mildly bearish to come in more in line with the subdued fear index. Stocks rose over 2% for the week for no particular reason. This coming week will be framed by the FOMC meeting followed by a Bernanke press conference on Wednesday. You may recall from last week’s market update, Ben Bernanke is clearly passing the baton to Congress to solve this fiscal problem. Consequently, I do not expect any decision to embark upon another easing program, including more twist. Expect only talk and no action. The Greek elections are just a sideshow. I’ll be surprised if Greece exits the euro and shocked if it exits the EU.
