Spain In Pain

Spain is feeling the heat this morning as the Spain/German 10 year government bond yield spread widened out to 508 Basis points- the highest since November as the Spanish 10 year yield hits 6.50%. There is continuing fear surrounding Spanish banks as shares in Bankia fell 26.75% when trading resumed this morning. Bankia is a unique case but it is at the moment dragging down confidence in the rest of the Spanish system- the sooner it is resolved the better and pressure is now increasing with the rising cost of borrowing. Spain have vowed to implement measures and there is talk of an EU bank rescue fund. The Euro whilst still under pressure against the USD is still holding on to much needed support at 1.25.

Recent polls in Greece have highlighted a flip back to the pro-austerity parties which is a relief for the markets and the euro as we open the week despite concerns in Spain. However we can expect a few swings to come in opinions as we approach election day on June 17. This week the markets will be looking for concrete signs of action from the EU group as we move into June. Risk trades like AUD and NZD opened higher in early trade on the back of reports of action but that will quickly retrace if confirmation does not follow soon.

Markets should be relatively quiet today due to a US holiday and for the remainder of the week again economic data will take a backseat as developments in Europe unfold.

Report by Phil McHugh