Daily Commentary: Fizzle
- no bang.
The financial market euphoria and U.S.
stock market rally I expected to materialize after the weekend announcement of
a European bailout for Spain's
debt stricken banks faded quickly this morning.
The global investment community got a look at
the details of the rescue package today and quickly concluded the $125 billion
size would probably prove too small and the initial terms of the deal make it
unlikely Spain
will be able to sustain the required debt service. If that early assessment proves accurate, the
capital flight from Spanish banks will almost certainly continue at its record
setting pace sending Spain
and probably other financially weakened countries like Italy
into the dark abyss of sovereign debt default.
Global investors are almost sick with fear
that the bank runs in Spain
and Greece will turn into
catastrophic stampedes if the anti-austerity parties opposed to Athens'
recent European/ International Monetary Fund bailout package win the June 17th
vote.
In a nutshell here is a summary of global
investors' greatest concern with regard to this event (as I understand
it). If leftist party candidate Alexis
Tsipras wins the election and forms a new government, he has said he will tear
up the current bailout agreement and demand a renegotiation. That action would almost certainly prompt
the European Central Bank and the International Monetary Fund to suspend aid payments,
setting Greece
up for a major sovereign debt default by September. Although Athens
could not legally be forced to leave the euro area, it would lose access to
external funding for the government and the banks, plunging the country into
chaos.
So what does all of that have to do with your
investors' rate sheets? As long as the
threat of a major collapse of euro area banks and sovereign debt structures
remains unresolved - the prospects for steady to perhaps fractionally lower
mortgage interest rates here at home remains solid as a direct result of heavy
"flight-to-quality" buying of U.S. dollar denominated assets like
Treasury debt obligations and agency eligible mortgage-backed securities by
foreign investors.
Looking ahead to the balance of the week --
Uncle Sam will be in the credit markets with intentions of peddling $66 billion
worth of 3- and 10-year notes together with a stack of 30-year bonds to the
global investment community. The
Treasury Department will sell $32 billion of 3-year notes on Tuesday, $21
billion of 10-year notes on Wednesday and they will wrap-up the auction process
with the sale of $13 billion of 30-year bonds on Thursday. The two major economic reports of the week,
the May Producer Price Index and the May Retail Sales figures, will be released
at 8:30 a.m. ET. Both reports are
expected to be mortgage market neutral.
My timing algorithms continue to suggest
mortgage interest rates will probably begin a more sustained move to higher
levels sometime between June 21st and the end of July. For the time being investors will be
reluctant to begin aggressively reducing their safe-haven investments in dollar
denominated assets like U.S. Treasury debt obligations and agency eligible mortgage-backed
securities before results of the Greek elections on June 17th are
known and the Fed has concluded its Open Market Committee meeting on June 20th. Until then, expect mortgage interest rates
here at home to chop nervously back and worth in a relatively tight range.
THE MARKET
IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME
