–The gold charts we showed you yesterday made the case for a golden recovery. Today we cede the chart analysis to the master, our technical guru Murray Dawes. Murray’s posted his latest big picture update over at his Slipstream Trader YouTube channel. Go have a look now.
— Murray’s work highlights the interconnection of markets. But you have to wonder if the equity markets have basically put up their hand to the bond market and said, “Talk to the hand, baby.” That’s what you do when someone has bad news you’d rather not hear, baby.
–What bad news? How about one-year Greek bond yields of 114%? This is the bond market’s way of telling you Greece is going to default. In fact, that news is probably old news for stock market investors. So what’s the new news?
–The new news – the news not priced into the stock market yet – is that the €3 trillion figure being thrown around in markets might as well be a basket of unicorns, shamrocks, and rainbows. If investors think the European Financial Stability Facility (EFSF) is the €3 trillion solution to Europe’s sovereign debt woes, they are bunch of suckers and deserve the losses that are coming.
–Moral judgements aside, the bond market is starting to communicate some useful information about Italy and Spain. Mind you, the European Central Bank has been doing the equivalent of putting its hand over the bond market’s mouth and telling it to shut up. By buying government bonds, the ECB keeps official borrowing costs down for Spain and Italy and confuses the price signals coming out the market.
–But the signals are still there. Yesterday Italy and Spain sold a combined $24 billion in bonds. Most of them were short term. The market is reluctant to lend to European governments for 30 years. But three months is doable.
–The yields on Italian and Spanish bonds are still remarkably low given the size of the debt that needs to be refinanced in the next 12 months. Italy paid 4.51% at its auction of two-year notes. The interest rate on 10-year Spanish government bonds is now 5.07%
–You can see from the chart below that Italian and Spanish 10-year yields have not yet gone the way of Greece, Ireland, and Portugal. If and when they do, all hell will break loose in financial markets. The ECB is trying desperately to prevent all hell from breaking loose.
–As for shares, the best thing you can say about them right now is that they’re not European government bonds. That alone may have accounted for the big moves overnight. Aussie stocks rocketed up 3.6% by the close yesterday. Gold, silver, and commodities rallied too.
–But it’s probably not a bad time to back up, grab a history book off the shelf, and see if anything like this has happened before. You’ll find a case study from Greg Canavan, editor of Sound Money. Sound investments. The excerpt is taken from a recent issue of his monthly report. It’s the anatomy of a credit contagion…
for Markets and Money