Here we go again with the PIIGS.
No it's not a typo--we really mean the PIIGS. Not the kind that are turned into some of the best meals in this world; we mean a block of countries in Europe that have some serious debt problems: Portugal, Italy, Ireland, Greece and Spain--PIIGS.
The trouble in the Euro zone is flaring up again after being either pushed to the back burner by all of the other news of the world or by some just wanting the problem to go away. Sadly, the problem is not going away and actually may be getting worse. On May 21 Standard & Poor's revised its outlook for Italy to "Negative" from "Stable." Although this downgrade is likely warranted, the ripple effect this is having on the financial world is quite strong.
The largest and most notable change is that of the U.S. dollar. Most investors, both domestic and global, always run home to what they are comfortable with when dark clouds are on the horizon. As of this writing the June dollar is up .876 to 76.45. Keep in mind the dollar hit a low of 72.68 on May 4. This quick run-up in three weeks has shown the "Flight to Quality" in the U.S. dollar.
Of course, there is some good news and some bad news related to the rapid increase in the value of the dollar. The good news is oil and its products from distillation have fallen over the last few weeks. Heating oil, which we use as a proxy for diesel fuel, hit an intraday high of 3.3372 on April 8 of this year. It fell from that high, rallied back to around 3.28, then took a nose dive to its current level of 2.83. The large downturn falls right at the same time as the upturn in the dollar.
The bad news is that most commodities have felt the same strain over the last few weeks. The cattle markets and hog markets are working diligently on changing trend from bullish to bearish. The grains rallied nicely on some fundamental news but are still showing some softness.
The events with the PIIGS are also providing some nice increases in the value of bonds. Investors are clamoring for not only high-quality bonds not related to the Euro countries but also for U.S. Treasury debt. The good news from this is that interest rates should remain low and there may be investors to pick up the slack of buying U.S. debt once QE2 is shut down.
Now back to the PIIGS. Italy is faced with mounting debt, a sluggish economy and politicians not wanting to balance the budget for fear of retaliation from voters. (This sounds familiar...) Huge roadblocks are facing those in Italy who want and need to develop a balanced budget for 2014. Greece is struggling with nearly 500 billion of public debt. (The U.S. spends around 4 billion more per day than it takes in and has a public debt of over 14 trillion dollars.)
One reason this debt issue is causing such a stir is that many other nations have purchased Greece's debt. If Greece were to default on their debt, then the countries who own their debt would in essence be lacking a source of revenue and have lost their initial investment. This cascades as the bonds issued by Greece may have been used as collateral to issue national debt or at minimum used as an asset on a balance sheet to determine a countries bond rating. If the Greece bonds are defaulted on and are pushed down in value, it may cause another country to lose its higher rating. Then those countries bonds are put on a watch list or maybe downgraded. Once these bonds are downgraded they may not be able to be held by certain institutions and a fire sale may ensue thus causing an even larger problem.
The recent events in Europe have shown that we now live in a global financial market. Ten or 15 years ago this type of situation may not have had a large effect on the financial markets here at home. But today, a tiny country like Italy is driving the U.S. markets down over 1 percent. Interesting.
Editor's note: Agvisors provides commentary about agricultural markets, including grain, dairy, livestock, equities, financials, and energy, highlighted by a live weekly webinar discussing conditions and responding to questions. For more information, visit http://agvisors.com.