$125 billion Spain Request

The big story in the news this weekend was Spain officially requested a $125 billion bailout to rescue its banks.  As recently as May 28th Spain’s Prime Minister, Mariano Rajoy, had said Spain would not need to request the bailout.  With the $125 billion bank bailout all but guaranteed from European finance ministers, the bigger question is will Spain itself need a bailout?  I believe they will, but it is unclear where the huge sum of money that would be needed to bail the country out would come from.

For more on Spain’s request click here: Spain seeks Euro bailout…

Here in the U.S., the Dow (a stock market index) was up over 280 points this past Wednesday on expectations the Federal Reserve would extend its current Treasury bond buying program(called Operation Twist).  Currently there is a tug-of-war occurring between bad news out of Europe and any news of government intervention in the U.S. or abroad.

The stock market has tended to rally on even a hint of government intervention even though to this point intervention has not solved the crisis.

I would not be upset if I never had to write about Greece again but it is worth mentioning that they are having elections again this Sunday.  The elections will determine whether or not they will implement the austerity measures (read: cut the level of government spending) that was required in return for their country to be bailed out by the European Union.

This story will be a key driver of stock and bond markets this week.

Global challenges

For the third straight year, summer is being welcomed in by a slumping stock market. This is something we warned about in our update on April 3.

Here is the latest on the situation:

Last week:

-By now I am sure you have heard plenty about the dreadful U.S. jobs report on Friday. There was an increase of just 69,000 jobs in May compared to expectations of 160,000 jobs added.
http://www.ft.com/cms/s/0/0a3ed818-abe2-11e1-a8a0-00144feabdc0.html#axzz1wmgbTXND

-Manufacturing activity in Spain plummeted to a three-year low. Germany and France also posted manufacturing figures at or near three-year lows.

-European Union statistics agency Eurostat said there were 17.4 million people without jobs in the 17 nations that use the euro in April. This is the highest level of unemployment ever recorded in the history of the European Union. The rise in unemployment is likely to add to discontent with the austerity programs underway in the euro member states.

-Brazil’s manufacturing sector showed contraction for a second straight month.

-Manufacturing activity in China slowed dramatically in May.

-This weekend, German Chancellor Angela Merkel doubled down on her opposition to joint debt sharing in the form of the euro bonds. If she does not change her mind it is hard to see how this crisis gets solved as it is apparent Spain, Italy, Greece and the others have no intention of real reform.
http://www.bloomberg.com/news/2012-06-02/merkel-rejects-debt-sharing-as-obama-urges-end-to-crisis-cloud.html

On the horizon:

-It appears to be a matter of time before the European Central Bank or the Federal Reserve attempts to ride to the rescue with some sort of stimulus plan.

-Will Spain’s 10 year treasury bond rise to 7%, a rate that would signal serious trouble

-Oil prices are down more than 20% in the last month. This should be a boost for consumers as well as for companies’ profit margins.

As always, we will continue to manage risk and look for opportunities!