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Is Spain Fixed?

Last updated 9/27/2012 5:15 PM EST (GMT -5) 0 Comments - Add your comment

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Neal Gilbert

Technical Analyst, GFT

Follow @FXexaminer

Lee Mis Labios ... No Habrá Nuevos Impuestos

Translation: Read My Lips…No New Taxes. For those who speak Spanish and would beg to differ the translation, you can either blame my high school Spanish teacher or Google Translate, take your pick. The famous words once used as a campaign slogan for the elder of the Bush presidents here in the US would have been a great line at the unveiling of the 2013 Spanish Budget Plan today.

After a two hour delay on the press conference to introduce it, the Budget had a few interesting subplots associated with it. First of all, because of the delay, investors were a little concerned that there was something fishy going on behind the scenes and sold risk assets ahead of the press conference. And there was good reason to be skeptical.

In the days leading up to the Budget announcement, protesters had lined the streets of Madrid to voice their displeasure about the austerity measures that had already been levied upon them. The region of Catalonia moved up local elections to take a vote on seceding from Spain due to their unhappiness in distribution of their taxes. Then a delay in unveiling their grand plan to avoid following a similar path as Greece!? Uh oh, things were looking ugly, and investors didn’t want to wait around for the aftermath.

Then something happened. Spanish leaders stepped up to the podium, and delivered their plan.  Much to the chagrin of skeptics everywhere, the market bought it. They lapped it up like a kitten discovering a saucer of milk for the first time. Risk markets soared as it evidently appeared that Spain wasn’t as dysfunctional as everyone had assumed, and they really could come up with a coherent plan to work their way out of their current quagmire.

The headlines spoke of no increases in taxes (except for lottery winners, which I wouldn’t classify as a new tax simply because the winner isn’t doing work to get the benefit); government plans that would help bolster the economy; and a plan to tap Social Security reserves up to 3 billion euros to help cover liquidity needs. The austere part of the plan would be in spending cuts, not taxes, which should serve to appease the masses for at least the near future.

Now the bad part, economic projections for the next year were set as a 0.5% decline in Gross Domestic Product, an increase in tax revenue of 3.8%, and a deficit target of 6.3% of GDP, same as this year. Huh? Evidently Spain believes they will stem the decline in their economy, and get more tax revenue than last year even though their unemployment rate has risen by almost 4% from this time last year, all while keeping their social spending under control. Plus the Social Security reserves are funded with Spanish Bonds, the very subject of continued speculation and rising interest cost. I need to get a Spanish accountant!

While the expectations of the Spanish government may be a little…shall we say…optimistic, the reality of the situation is that Spain may soon need to go to the Troika to request the bailout that many market participants feel they need. The rally in risk today may have been just an anticipatory jump on the inevitable path to a Greek-like state for Spain.

And in late news toward the US close, the rating agency Egan Jones just downgraded Spain. No Habra Nuevos Impuestos!

Obi-Wan Bernanke

Lost in all the Spanish hoopla today was the release of US Initial Jobless Claims that printed at 259k on expectations of 378k. Today’s low number is the best result since mid-July and could indicate that next week’s Non-Farm Payrolls reading may be on par with July’s release of 141k. And this is exactly what Federal Reserve Chairman Ben Bernanke wants you to think.

When the Fed released their shiny new version of Quantitative Easing almost two weeks ago now, the timing seemed a little odd. Not only was there a lot of risk to markets with the coming Fiscal Cliff scenario, but stocks were close to all-time highs, and the presidential election was a couple short months away. Why would the Fed need to bolster an already recovering economy and potentially influence who becomes the Executive in Chief when it could better use that weapon to battle political bumbling from Congress?

Well, part of what Jedi Master Bernanke employs with his monetary bag of tricks is the ability to influence the masses. If Bernanke can’t beat you with his QE∞ light saber, he’ll look at the interest rate expectations calendar you have hanging on your office wall (What? You don’t have one?) and command it to smack you upside the head.

That’s the thing about the central bank of the United States; they have the staying power to bend the market in the direction they want it to go. Whether that means actually taking QE out to infinity or making us think they will, they want the market to be RISK ON. That means setting our expectations on interest rates in the future to continue to be low so we buy houses and refinance them; having us think that they will forcefully recover the job market, or else; or just making us sick and tired of being pessimistic and just go with the flow. We will eventually bend to their will.

Bernanke actually wrote about this in a research paper titled, “ Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment ”, where he listed one of his policy alternatives as, “ using communications policies to shape public expectations about the future course of interest rates.” 

However, despite the overwhelming power of the Fed, there is a Sith Lord to their Jedi Master, and that is inflation. If inflation starts to get out of control, which means a clear trend above the Fed’s 2% target, much of this bending to their will could stop very quickly, and then we will have a whole new crisis to be concerned about.

In the long term though, markets may continue to head higher even if US figures disappoint because that is the way the Fed wants it to go.

Looking Forward

The evening calendar will serve primarily as a Japanese data dump as 18 economic releases of note will be released. It is likely that none of them will create any kind of significant moves in the JPY crosses, because most of the price action will be interpretations of Spain.  

The AUD/USD in particular has been making an impressive run back up since yesterday and has broken a bearish trend line that goes back to the QE ∞ highs. If Asia is as satisfied with the Spanish Budget Plan as the rest of the world, a run back up to resistance from last week at 1.0520 may be in order. Risk is primed for a comeback, and the AUD may be the biggest beneficiary.

For more intraday analysis and trade ideas, follow me on twitter ( @FXexaminer ) and/or Facebook (FX Examiner).

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About The Author

Neal Gilbert, an avid follower of the markets, began working at GFT in 2006, educating new and experienced traders in an easy-to-understand manner. His focus has been teaching common technical indicators, risk management, and sharing his favourite trading strategies. His Braving the Rapids strategy guide can be found on GFT’s website.

Neal conducts live webinars throughout the day, including his” Long and Short of It,” which is a Fundamental Live Market Analysis webinar centred on key economic releases. He also conducts webinars in Basic and Advanced Technical Indicators, Volatility and Risk Management, Trader’s Edge, and Fibonacci Trading and Theory.