Storm Clouds Gather Over Europe

It was a bad morning in Europe yesterday as Spanish bond yields soared to euro records and Fitch Ratings downgraded 18 Spanish banks over the ongoing debt crisis in Spain and across Europe.
 
The Eurodollar (NYSEARCA:FXE) declined to $124.79, continuing its long descent which started in early May.
 
Spanish 10 year bond yields rose to 6.8%, a record, and Italian 10 year bonds spiked higher to 6.2% as investors worried about solvency in Europe.
 
Meanwhile, German Chancellor Angela Merkel reiterated Germany’s opposition to a Euro Bond plan as clearly the Germans are growing tired of bailing out weaker countries in Europe.
 
In spite of the troubling news from Europe yesterday, major European indexes advanced as did European exchange traded funds.
 
iShares MSCI Spain Index (NYSEARCA:EWP) advanced 0.92% approaching noon in New York yesterday while iShares MSCI Italy ETF (NYSEARCA:EWI) traded nearly flat.
 
U.S. indexes were mostly higher at mid-day with the S&P 500 (NYSEARCA:SPY) up 0.6% and the Dow Jones Industrial Average (NYSEARCA:DIA) gaining more than 100 points.
 
Markets are apparently hoping for another round of stimulus from global central banks as the situation worsens in Spain and across Europe.  Italy is already coming into sharper focus as the 4th largest economy in Europe also struggles with a high debt load.
 
Both Italy and Spain now see their 10 year bonds approaching dangerously close to the “unsustainable” 7% level.
 
Volatility is likely to continue as the Greek election looms larger every day.
 
Bottom line:  Europe remains highly unstable as Spain and Italy find the cost of their debt service skyrocketing as recession spreads across the Continent.  Greece remains a wild card, and while markets are counting on central bank intervention, the potential for disappointment is high.