European Bank Run Is Warming Up
Saturday, May 19, 2012
The prospect of Greece declaring “true” bankruptcy and the country’s potential choice to exit the euro became all too real and cannot be ignored. But the true fear emanates from the side effects that lurk in the shadows and the monumental losses that will ensue, affecting everyone in sight. And that’s only a small country, with Spain adding to the concerns on a daily basis. Downgrades this week were back in fashion, with Moody's Investors Service on Thursday lowering ratings of 16 Spanish banks by one to three notches, increasing borrowing costs across the spectrum, although reliable information is still being divulged.
Spain's Budget Ministry said Friday it has revised its budget-deficit estimates for last year to a wider 8.9% of gross domestic product as a result of higher debt reported by several regional governments.
As if all of the above wasn’t enough, reports of people withdrawing cash from banks in Greece and Spain as fast as they can, added to the fear of a financial collapse in the making. Certainly the authorities have been telling the world that all is well and under control, but the message is becoming stale and investors aren’t falling for the rerun. Then there was J.P. Morgan with the trade of the year.
Wednesday brought some “quantitative” hope that faded away, with several Fed members indicating that additional monetary policy accommodation could be necessary "if the economic recovery lost momentum or the downside risks to the forecast became great enough," according to the minutes. But nobody knows what the trigger looks like.
U.S. Economics: The CPI was unchanged in April as a drop in the cost of gasoline offset rising food, apparel and car prices, while core prices, which exclude food and energy, rose 0.2%. For the last 12 months, the CPI and the core reading rose 2.3%. Retail spending in the U.S. grew a meager 0.1% in April after sharp gains in the first three months of the year. Excluding the auto sector, sales rose 0.1% last month as well, further showing economic weakness.
On the housing front, The National Association of Home Builders/Wells Fargo housing market index rose to 29 from 24 in April. New home construction rose 2.6% in April to an annual rate of 717,000 units, while permits fell 7% to 715,000 one month after reaching a four-year high. Housing starts in March were revised up sharply to 699,000 from 654,000, while permits were revised up to 769,000 — the highest level since September 2008 — from an original reading of 747,000.
The Mortgage Bankers Association’s index of mortgage application activity, which includes both refinancing and home purchase demand, jumped 9.2% in the week ended May 11, mostly due to refinancing applications which increased by 13.0%. However, and far more important, loan requests for home purchases dropped 2.4%. In addition, mortgage delinquencies for the quarter are running at 7.4%, still double the historical average.
Factory, mine, and utility output increased 1.1% in April, but March production was revised down to -0.6% from the initial estimate of unchanged. February production was revised up to a 0.4% gain from a flat reading. Capacity utilization rose to 79.2% in April from 78.4% in March, and it was the highest reading since September 2008.
The surprise came from manufacturing firms in the Philadelphia region, where business conditions worsened in May, according to the Federal Reserve Bank of Philadelphia. The Philly Fed index fell to -5.8 from 8.5 in April, the first contraction in 7 months. The new-orders index dropped to -1.2 from 2.7 in April and the employment index also turned negative.
Global Economics: The good news is that the German economy returned to growth in the first quarter, with GDP rising 0.5% from fourth-quarter of 2011. However, the aggregate GDP for the Eurozone stagnated in the latest quarter compared with the prior three months.
Industrial production in the Eurozone fell 0.3% in March from February. The figures stood in contrast with German data last week showing output in the euro zone's largest economy up 2.8% for the month, and highlighting that Germany cannot carry the ball by itself. Eurozone annual inflation was 2.6% down from 2.7% in March. A year earlier the rate was 2.8% and ECB interest rates have not changed, showing the underlying deflationary pressures.
The other item to note, was a drop of 2.4% in China's foreign direct investment inflows in the first four months of 2012 versus last year. This was the longest stretch of declining inflows since the global financial crisis, and further indication that China may not be able to save itself, much less others.
Market Trends: Short-term stock market trends are still negative, with long-term trends turning negative from neutral, while technically oversold levels have not been able to provide a rebound. The dollar continues to climb, and the euro continues its descent. The yen turned positive this week as the flight to safety took place, and short-term and long-term oil — WTI and Brent — reaffirmed their negative stance, keeping the commodity discount sale alive. Copper broke below the $3.50 level and kept its negative trend. Gold continued its negative trend from last week and closed below $1,600 again, although benefiting from a bounce by the end of the week. Silver was virtually unchanged for the week while keeping its negative short and long-term trends intact. The 10-Year Treasury rate decreased once again from 1.84% last week, and is now at a record low of 1.70%, while U.S. Treasuries continue to be the destination of choice for nervous investors.