European social unrest halts markets rise

Central banks have been dominating the news during the last month, with the ECB and the Federal Reserve taking action including purchasing bonds in the open market in order to help their respective economies and, it is hoped, avoid the worst.

In Europe, the ECB is trying to put a cap on the bond yields of peripheral countries while in the US, the FED is worried about a struggling job market and is so it to embark upon a program to print as much as $40 billion each month in the, likely vein, hope of lifting employment figures.

While there is no conditionality for the bond-buying program in the US, in Europe, the program is not only sterilised but also dependent on tough conditions. The ECB said it would only buy sovereign debt from countries applying for a full bailout or, at least, submitting to prevention programs designed by the EU to avoid the problems of indebtedness.

During the last weekend there have been demonstrations and social unrest in both Portugal and Spain. Until now, Portugal has been peacefully accepting all austerity measures imposed on its people by the coalition government but the results so far have been disastrous as the economy has submerged into one of the profoundest recessions ever seen in the country with unemployment now above 15% and GDP expected to decrease more than 3% this year. The Portugese Prime Minister just recently, likely went too far by announcing an increase in the social contribution from 11% to 18%. The measure was not welcomed and between 500,000 to 1m took to the streets to show their discontentment in, so far, peaceful demonstrations around the country. In Spain, social unrest has also risen, with the Catalunia region now asking for independence.

The unrest mounting in those two countries may upset the applecart within the EU. The coalition government in Portugal is now at risk and may well fall with a new election may be on the cards. In Spain, Rajoy is concerned with the unrest that will likely stem from any new austerity package he implements and so, thus far, he is holding out on asking for a full bailout for his country. The market is pressing Spain  however to go thus route as yields are rising again, with a 10 year yield now back around 6%. As the ECB has stated that its bond-buying would not target countries not applying for a bailout (or some precautionary measures), bond yields may continue to rise while Spain does not apply for it. At the same time, the social unrest coming from within may be too much for the government to deal with. They truly are between a rock and a hardstone.

Not surprisingly this has weighed on the Euro and it is now off its highs of 1.3172 hit Monday, trading at down at 1.2990 today (this magazine suggested a short trade at 1.3160 on Friday that is now working out well – http://www.spreadbetmagazine.com/blog/2012/9/14/2-sbm-trading-positions-entered.html). The French CAC 40 market is trading off its multi-month high held at 3,588 Monday and similarly, Spain is off the high observed at 8,231 and is currently quoted around 8000. US markets hve opened without a clear direction again as traders attempt to weigh the very real risks that still remain.