“Stocks have had a mixed reaction to the Spain’s bailout. Initially, Asian and European markets were up and the U.S. followed suit for the first few hours. Then U.S. markets reversed course. My take is that the 100 billion euro bailout supports the Spanish banks but does nothing to address the underlying issues in Spain. Also, Italy, which is responsible for about a quarter of the bailout, is going to have to borrow money at higher rates than they will be lending it at. That doesn’t make a lot of sense. However, their banks will benefit from reduced counter-party risk from the Spanish banks.
Going forward there may be need for more aid. Spanish banks have 180 billion euros worth of troubled loans associated with the real estate sector, not including the 600 billion euros in mortgage loans. But for now we turn our attention to the upcoming Greek elections—and my hopes are not high regarding the future of Greece.
In the U.S. we have seen equity markets bounce from oversold conditions in May.That being said, I don’t think we are in for a sustained rally. Look for choppy markets throughout the summer as the political rhetoric heats up.”
(Jeremy Nelson is Chief Investment Officer of Pinnacle Trust in Madison, MS)