Debt Troubles in Spain Regain Market Focus
Equity markets finished lower to close the week on comments from finance ministers in Spain which suggested that the recessionary conditions in Europe are likely to carry int 2013. The most direct impact of the commentary was seen in Spanish bond markets, with yields rising to an all time high for the Eurozone era. The higher funding costs for Spanish treasuries became the main driver for the Friday sell-off in equity markets as it is becoming increasingly difficult for Spain to meet its government debt obligations.
Given that these activities are finance-related, it was not surprising to see most of the bearish sentiment directed toward the banking sector. European lenders saw some of the biggest drops but even US banks, such as Bank of American and JP Morgan were lower by nearly 2 percent. Commodity prices were also lower after China announced that property control policies would not be made less restrictive, bringing down forecasts for new building developments later in the year. On the whole, the S&P 500 posted losses of 1 percent during the Friday session, giving back most of the nearly 2 percent rally that was seen earlier in the week.
Price Declines Center in Euro Area
Declines were also seen in the Euro as the US Dollar moved higher against most of the majors, and the EUR/USD forex pair is now trading at its lows for the year. Moves in the EUR/JPY have been even more substantial with the EUR/JPY trading at its lowest levels since 2001. Downside moves in the EUR/JPY are highly correlated with risk aversion, so these latest move show that market is firmly in bearish territory for the moment. Trading volumes in stock markets are in line with the 3-month moving average, and this is seen as helping to give confirmation of the latest moves.
Market attention is centering once again on the debt problems in the Euro area and in Spain specifically, as the region’s finance ministry gave final approval for bailout loan funding and Valencia (the region with the second highest debt levels) requested emergency loans. Uncertainty in the region (with respect to the country’s ability to meet its treasury obligations) continues to weigh on regional stock prices and in global markets as well.
One of the larger market moves in recent weeks is being seen in the EUR/JPY, as prices have now approached levels that have not been seen since the beginning of 2001. With indicator readings firmly in bearish territory without being oversold, so the suggestion here is that the latest declines have further to extend. Shorter term, a break of resistance at 96.20 will take pressure off of the downside and turn the bias to consolidation. Below, support is now seen at 95.30 and this area can be used for buy entries in contrarian positions. Stops should be kept tight, however, as longer term momentum is clearly to the downside.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.