Yesterday’s News: The Pain in Spain

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jul 24, 2012 9:40:29 AM

and tagged Yesterday's News

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Two big themes in the papers today—Europe’s continuing weakness and China’s growing assertiveness in the world.

Europe first. Spain is the big news, with yields rising even higher into unsustainable territory, driven by the regions, as I discussed yesterday. The Financial Times (FT) leads on page 1 with “Spain costs stoke bailout fears” and follows on page 4 with “Madrid in duel with regions for aid.” Spain will end up in a bailout, probably pretty shortly, and, as the fourth largest economy in Europe, this is going to strain the system—maybe to the breaking point.

The Wall Street Journal (WSJ) gets into this on page A1 with “Europe Dims German Outlook,” discussing Moody’s downgrade of Germany and the Netherlands to a negative outlook in their bond ratings. Moody’s cites the increasing risks and costs of either maintaining or abandoning the euro—either way, even the solid countries are facing much larger costs. On page A10, “Spanish Economy Slides as Germany Sputters” gets further into the effects on the real economy in those countries.

The New York Times (NYT) is less specific but does weigh in, also on page 1, with “In Euro Zone, Debt Pressure Tightens Grip” and follows up on page B1 with “Spain’s Plight Helps Depress Global Stocks and the Euro.”

In all three papers, we have a front-page story with further stories deeper in. Does not sound like this problem is going away any time soon.

The other meta-story in the news is China’s rise. The front-page news is the Cnooc acquisition of the Canadian company Nexen, described on page 1 of the FT in “Cnooc in $18bn Canadian oil deal” and on page A1 of the WSJ in “China Push in Canada is Biggest Foreign Buy.” The story doesn’t make the front page of the NYT, but it does make the front business page, B1, with “Chinese Oil Company Bids $15 Billion for Canadian Producer.” This transaction is further evidence that China continues to seek resources around the world and that it is now moving from doing deals that are smaller or in remote areas into making large deals in the major developed nations.

Chinese assertiveness is not limited to business. Two of the papers deal with the developing territorial disputes in the South China Sea. On page 6, the FT has “Island spats threaten China-Japan ties.” The NYT has “China to Put Soldiers on Islands in Dispute” on page A4. This is yet another emerging problem that, for a while already, has been on the radar of some of the other news sources I follow. The fact that it is now hitting the mainstream press suggests that it is probably becoming more visible because it is getting worse. Pay attention to this going forward.

Another sign of things to come with China is on page C4 of the WSJ in the article “Indonesia Joins Yuan Bandwagon.” Even though the Chinese currency still has weaknesses as a global currency, it is definitely moving toward more acceptance. This, too, will be a growing story going forward.

Overall, as the situation in Europe heats up again, and as the solutions that earlier calmed the markets look less sustainable, the appetite for global risk continues to decline. The U.S. economy continues to send positive signals, as discussed on page A2 of the WSJ in “Home Prices Reflect Strengthening,” but the decline in the global climate is still leading to headlines like “Treasury Yields Go Even Lower” from page C1 of the WSJ.

Have a great day!

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