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90 seconds at 9 am: Fear over Spanish bailout sparks rout on Southern European bond markets; NZ$ down a cent to 75.3 USc; BHP freezes new investment decisions
Here's my summary of the key news overnight in 90 seconds at 9 am, including news of a rout on Southern European bond markets on fears Spain will soon need a bailout, or worse, may have to exit the Euro.
Spain's 10 year bond yield rose to a Euro-era record high of 6.7% and its spread above German 10 year bund yields rose to over 540 basis points. This spread is closely watched as an indicator of capital flight out of Spanish bonds denominated in euros into German bonds denominated in euros. The 10 year German bund yield dropped to a record low 1.26% overnight. The 2 year German bund yield fell to 0% overnight. See more here at Bloomberg.
If Spain were to exit the euro, now known as 'Spaxit', then bond investors would not have to take any losses as they had moved their funds into Germany. The blowout in that spread shows the capital flight now underway from Southern Europe into Germany. The rise over the 500 basis point threshold is seen as crucial. The spreads for Greek, Irish and Portugese bonds were over 500 basis points for 16 days, 24 days and 34 days respectively before they were forced into bailouts.
The Telegraph's Ambrose Evans Pritchard reported Spain's former Prime Minister Felipe Gonzalez described the bond market rout as a "situation of total emergency, the worst crisis we have ever lived through.”
This fear about Spain needing a bailout saw European stock markets fall around 2% overnight. See BNZ's currencies report on our site here.
That also drove a reduction in risk appetites in America and on many other markets. The S&P 500 closed down 1.4% and the New Zealand dollar, which often falls when appetites for 'risky' assets drop, fell almost a cent to 75.3 USc overnight. The US 10 year bond yield fell to a 60 year low of 1.63% in another sign of a rush to safe haven assets. Oil fell 3% to a six month low on the widespread move to take risk off the table. See more here at Reuters.
However, there were signs overnight that European authorities were grinding into gear to try to find a solution to Spain's problems, albeit well after the market's signals.
Bloomberg reported the European Commission has called on Germany to accept the direct use of the European Stability Mechanism (ESM) to bail out Spain's banks. It has also called for a roadmap towards joint issuance of Eurozone bonds, which is seen as one solution to the problems on Southern Europe's bond markets. However, the Germans yet again rejected these suggestions, which would see German funds guaranteeing or rescuing Southern European governments and banks.
Also, the European Commission gave Spain another yet to meet its deficit targets.
Meanwhile, across the Tasman, BHP's CEO Marius Kloppers told China's Caixin news service the Australian mining giant had frozen all major investment decisions for six months because of falling prices and weak demand from China, ABC reported.
Also in Australia, editors at Fairfax's Sydney Morning Herald, Age and Financial Review staged an immediate 36 hour wildcat strike overnight in support of 60 colleages at the Illawarra Mercury and Newcastle Herald newspapers who are set to lose their jobs in a move to outsource their work to Fairfax editors in New Zealand, ABC reported.
This situation highlights the way the use of the Internet is opening up new markets, particularly in services, to global competition.