What’s the Story? The Beatings Will Continue

by CC July 23, 2012 9:10 am • Commentary


Wall Street headed for a sharply lower start Monday, set to follow a global equity rout as fears of a full-fledged Spanish bailout and a Greek exit from the euro returned to the spotlight.

Futures on the Dow Jones Industrial Average DJU2 -1.59% sank 206 points, or 1.6%, to 12,567.

S&P 500 index futures SPU2 -1.41% dropped 19.40 points to 1,338.8, while Nasdaq-100 futures NDU2 -1.23% lost 42.50 points to 2,570.7.

“We start yet another week with a very fragile backdrop — that of Spanish debt trading at the widest euro-era levels and politicians and policy makers doing little to stem the crisis,” wrote strategists at Lloyds TSB, in a note to clients.

Spanish government bond yields picked up where they left off Friday, soaring to another round of euro-era highs. The yield on the 10-year benchmark ES:10YR_ESP +2.97% rose 0.25 of a percentage point to 7.44%, well above the 7% threshold widely viewed as potentially unsustainable in terms of long-term government borrowing costs.


Spain’s economy sank deeper into recession in the second quarter, its central bank said on Monday, as investors spooked by an undeclared funding crisis in its regions pushed the country ever closer to a full bailout.

Economic output shrank by 0.4 percent in the three months from April to June having slumped by 0.3 percent in the first quarter, the Bank of Spain said in its monthly report.

Economy Minister Luis de Guindos ruled out a full-scale financial rescue on top of the 100 billion euros already earmarked for the country’s banks, but Spain’s sovereign bond yields stayed mired in the danger zone.

In contrast to de Guindos, who told lawmakers there was little else Spain could do to ease the tensions after it approved a 65-billion-euro austerity package last week, the central bank’s deputy governor said more belt-tightening was needed.

“(Current market problems) reflect problems in Spain as well as the euro zone,” Fernando Restoy said after a conference in Madrid when asked about market stress.

“We need to continue further along the same line. We need more cuts, more reforms which will restore market confidence and mechanisms which will strengthen the monetary union.”


Headlines are crossing  that Spain’s market regular is banning short-selling on stocks for three months. But that’s having little immediate impact right now: Spain’s IBEX 35 is down 2.5%, hovering around a nine-year low. Meanwhile, borrowing costs are shooting higher. Yields on 10-year Spanish bonds surged to euro-era highs around 7.5%.

It’s playing out across asset classes. The U.S. Treasury 10-year bond yield has dropped to a fresh record low of 1.40%, crude oil (WTI) is down 3.7% and the euro is down 0.6% at $1.2086.

German Vice Chancelor Philipp Roesler ‘s comments on Greece will meet its conditions for a bailout are also spooking markets this morning.

“What’s emerging is that Greece will probably not be able to fulfill its conditions,” Roesler says. “What is clear: if Greece doesn’t fulfill those conditions, then there can be no more payments.” He also noted the prospect of Greece leaving the euro “has long ago lost its terror.”


McDonald’s Corp., MCD -1.27% the Oak Brook, Ill., fast-food major, reported second-quarter net income fell 4.5% on revenue little changed from a year earlier. Earnings declined to $1.35 billion, or $1.32 a share, from $1.41 billion, or $1.35, in the year-earlier period. Revenue was $6.92 billion compared with $6.91 billion. A survey of analysts by FactSet Research produced consensus estimates of $1.38 a share of profit on $6.94 billion of revenue. Currency translations knocked 7 cents a share off the latest earnings, McDonald’s reported. In a Monday statement, Chief Executive Don Thompson said the results reflected “the slowing global economy, persistent economic headwinds” and its investments in its operations. Globally, comparable-store sales rose 3.7%; comp sales were positive in each geographic region, the firm said. McDonald’s shares were off 2% in the premarket