This morning, I can’t shake a feeling. It is like a portent, a nagging feeling something bad is coming. Maybe it is Spain’s recent mid-term bond auction, high yields mixed with decent demand. Does the demand signal confidence or is it simply risk-oriented investors gambling?
The auction proved the Spanish Treasury can still borrow on international markets, albeit at a high cost, and it made the best of solid demand by selling 2.2 billion euros ($2.8 billion) in bonds, above the targeted amount.
Yes, the yields are going down, the demand is strong, and, yet, I can’t shake my sense that this story is going to take another twist. Will it be a turn for the good or bad?
Maybe my nagging feeling comes from the flatness of the US labor market. Joblessness is not going up, but the relative steadiness of the unemployed numbers gives me pause, even as I believe that facet of the US economic recovery is in a holding pattern, and when the factories kick back in to replace the goods not on the shelves, those numbers will go down.
A survey of chief executives shows fewer large U.S. companies plan to hire or boost spending in the next six months. Only 43 percent say they plan to step up spending on machinery, computers and other large goods, down from 48 percent.
Even though the above numbers suggest hiring will we be flat, in the next breath, the media tells me that CEOs actually see their sales increasing, which lends credence to the notion that the shelves will deplete further and the restocking will begin. Yet, I can’t shake the nagging feeling.
Most CEOs still expect sales to increase in the next six months. Overall, the CEO Outlook survey index fell to 89.1 in the second quarter, down from 96.9 in the first three months of the year. Any reading above 50 indicates growth.
No, my sense of unease is not about the US. It is coming from Europe. It is the looming battle between France and Germany, the one I mentioned yesterday.
European Central Bank Executive Board member Benoit Coeure told the Financial Times that the European Financial Stability Facility has the ability to reduce yields. ‘Certainly it’s a mystery why the EFSF was allowed almost a year ago to undertake secondary market interventions and governments have not yet chosen to use that possibility.’
The facilities are in place to alleviate Spain’s bond distress, but, as of now, intervention is only rumor, which explains the drop in mid-term yields. Yup, I understand my feeling now. It is the political war that is coming. It will be ugly and the outcome is inevitable, but the war will still do damage to the market. How long will it go on before Germany surrenders, again?
German Chancellor Angela Merkel said allowing direct sovereign debt purchases through the euro-area bailout fund “is not up for debate” at present. French President Francois Hollande told reporters at a press conference after the Group- of-20 summit in Los Cabos, Mexico, this week, that he backs the idea.
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