{"id":39695,"date":"2013-07-03T14:09:38","date_gmt":"2013-07-03T18:09:38","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=39695"},"modified":"2013-07-03T14:09:38","modified_gmt":"2013-07-03T18:09:38","slug":"sizemore-insights-2013-07-03-133916","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/07\/03\/sizemore-insights-2013-07-03-133916\/","title":{"rendered":"Sizemore Insights 2013-07-03 13:39:16"},"content":{"rendered":"

By The Sizemore Letter<\/u><\/a> <\/p>\n

Uh oh\u2026more bad political news out of Europe.\u00a0 Portugal\u2019s government is at risk of falling<\/a>, as two key ministers resigned in protest over the EU\u2019s mandated austerity policies.\u00a0 This follows a massive protest in Greece after budget cuts forced the government to shut down the bloated state broadcaster (and fire all of its employees) and the conviction and sentencing of Silvio Berlusconi on sex and abuse of power charges.<\/p>\n

Is it time to start worrying about Europe again?<\/p>\n

No, or at least not yet.<\/p>\n

The Portugal developments are a little worrying but not exactly unexpected.\u00a0 This is politics, and if the Portuguese believe they get a better deal by challenging their creditors by taking this to the brink, then that is exactly what they will do.\u00a0 Spain and Ireland are also negotiating a retroactive bank bailout that would shift the debts taken on to the EU\u2019s bank bailout mechanism and off of Ireland and Spain\u2019s governments.\u00a0 Negotiations are still dragging on\u2026and I don\u2019t expect a definitive conclusion this year.<\/p>\n

All of that is fine and good, but surely there will come a point to panic, right?<\/p>\n

\"Figure<\/a><\/p>\n

Figure 1: Italy 10-Year Yield<\/p>\n<\/div>\n

\"Spain\"<\/a><\/p>\n

Figure 2: Spain 10-Year Yield<\/p>\n<\/div>\n

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Maybe.\u00a0 And that is why I am watching Spain and Italy\u2019s 10-year bond yields (Figures 1 and 2).<\/p>\n

Spanish and Italian bond yields have been trending downward for the past year.\u00a0 If you might recall, ECB President Mario Draghi make his now infamous \u201cdo whatever it takes\u201d comments almost exactly a year ago, and they had the desired effect.\u00a0 Except for a brief blip in February, yields have falling almost continuously.<\/p>\n

This, until now.\u00a0 Starting in May, Italian and Spanish bond yields have started to creep up again.\u00a0 Spain\u2019s 10-year yield briefly popped over the psychologically important 5% mark last month, and Italy\u2019s came close.<\/p>\n

Is this cause for concern?<\/p>\n

At first glance, I would say yes.\u00a0 But let\u2019s keep it context.\u00a0 Virtually all yields everywhere in the world rose in May and June over fears that the Fed would be tapering its quantitative easing programs.\u00a0 But once the dust settled, it became obvious very quickly that the bond market had jumped the gun.\u00a0 The tapering\u2014if it happens\u2014is still 6-12 months away.\u00a0 And even when it does come, it is not likely to be as harsh as the bond bears fear.<\/p>\n

That\u2019s nice.\u00a0 But what does it mean for Spain and Italy, and when do we panic?<\/p>\n

This will be the signal for me: if yields in the U.S. and Germany continue to drift lower, but Italian and Spanish yields rise, that would be a divergence that got my attention.\u00a0 It wouldn\u2019t mean that a crisis was imminent, but it would mean that the bond market had lost confidence in the Eurozone again and that Draghi\u2019s \u201cwhatever it takes\u201d is simply not enough.<\/p>\n

I don\u2019t see that happening, and I am viewing any dips in the prices of European stocks as buying opportunities.<\/p>\n

But if I\u2019m wrong\u2014and Spanish and Italian yields shoot above 5% again\u2014it will be time to take a little risk off the table and get at least partially defensive.<\/p>\n

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Related posts:<\/p>\n