An "Emperor Has No Clothes" Moment: ESM Has Failed Already

In what may become a historic "Emperor Has No Clothes" moment, the euro, stocks, oil, and European government bonds all quickly reversed course following initial euphoria of a Spanish bank bailout that is sure to do more harm than good.

For details of the bailout please see Rajoy Proclaims "Victory", Says It's Not a Bailout "It's a Credit Line"; Existing Bondholders Subordinated

S&P 500 Futures 5-Minute Chart



Notice the ramp late Friday. Someone knew before the announcement, this bailout was coming. Official news did not come out until Saturday.

The market gapped up this morning on the news, and those who bought on Friday likely dumped at the open.

Not only was the initial Monday morning gap up taken back, the late-day ramp job on Friday went down the drain as well.

Subordinated Bondholders

This is what I had to say on Sunday regarding Subordinated Bondholders

In the too stupid to make up category, Rajoy defends ‘victory’ for EU credibility

"Holders of the subordinated debt will probably have to accept losses". So who wants to hold that debt given what happened to Greece?

It will be interesting to see if there is initial euphoria in the bond markets. Regardless, sooner or later (probably sooner), selling pressure will eventually overtake any initial excitement of this alleged "victory".

Bond Selloff

Someone emailed on Sunday proposing the market would run for about six days. While not making a specific prediction, I suggested the rally might not even last a day, and that it all depended on European bonds.

Spain 10-Year Bond Yield 6.508%



In the initial misguided euphoria, the yield of Spanish 10-Year bonds fell 15 basis points. The yield is now up nearly 30 basis points.

Chart from Bloomberg.

Italy 10-Year Bond Yield 6.03%



Chart from Bloomberg.

"Emperor Has No Clothes"

Those bond movements are the "Emperor Has No Clothes" moment.

Who wants to hold Spanish or Italian debt if it is going to be subordinated by special deals made to governments from the ESM?

ESM Has Failed Already

Rather than calm the bond markets, Rajoy's alleged "victory" is going to strengthen the selloff. The ESM concept has already failed. Ironically, the ESM has not even been officially launched!

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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