Spain has a real head of steam up as it moves into the overtaking lane ahead of Greece, and out of the eurozone. That’s not my view; just look at the way financial markets traded overnight.

US bond yields fell to levels not seen since just after World War II and yields on German and UK bonds fell to all-time lows as investors abandoned the likes of commodities, the Australian dollar, the euro and anything else perceived as “risky” and bolted for safe havens. Italy is hanging in there as well as shares and commodity prices tank for yet another month and the biggest bond rally in history continues.

In an extraordinary signal of just how fraught these concerns about risk and the eurozone are (and its a very perverse reaction), yields on two-year German sovereign bonds hit zero — that’s right, the big naught. That compares to the record low of 0.27% on US government two-year debt. The zero rate is lower than Japan’s (which had been the lowest around the world) and means investors are prepared to lend money to Germany for no return — and after transaction costs, are paying to lend Germany funds for what is a long time, in the current febrile market environment.

The Financial Times reported that US 10-year yields fell as low as 1.62%, a level last reached in March 1946 and lower than dividend yields on the shares of 26 of the 30 companies in the Dow Jones index. German benchmark yields reached 1.26% while Denmark’s came close to breaching the 1% level, hitting 1.09%. UK rates fell to 1.64%, the lowest since records for benchmark borrowing costs began in 1703.

Overnight, futures market yields on Australian 10-year bonds dipped to close to 3%, the lowest for decades. Wall Street fell more than 1.2%, worried by weak house sales data, the rising US dollar, Europe and China. It’s heading for a nasty fall for May of 6-7% (supporting the market adage of “sell in May and go away”). Another fall in the price of Facebook shares (to under $US28) hit the tech stocks as well, underlining the view there are no bolt holes left in equities at the moment.

The Australian dollar fell more than a cent to reach 97 US cents in Asian trading this morning after stockmarkets around the world sold off on the new fears about Spain. The Aussie dollar is now down more than 10% from its high in late February of $US1.0816.

The fall overnight was also helped by the weak retail sales figures for April (reports ignored the March revision to a 1.1% increase from 0.9%) and the absence of any further news from China on a stimulus package as reports on official Chinese government websites appeared to rule out any new spending. The Australian market opened with losses of close to 1%, pushing its fall for May close to 9.5%, which if it holds by the close at 4pm today would make May the worst month since September 2008 when Lehman brothers collapsed.

For all the importance of those other factors, it’s Spain’s rapid decent that is gripping the markets. The Spanish government denied it had been knocked back by the European Central Bank in a scheme to bypass credit markets and raise the 19 to 23 billion euros of bailout money from the zone’s central bank that will be used to recapitalise and take control of Bankia, Spain’s fourth-biggest bank which has been crippled by bad property loans. But while the ECB said there had been no approach, the Financial Times, which broke the story yesterday, didn’t change it on its website.

Spain’s Economy Ministry played down the FT report that Spain would try and raise the funds by injecting sovereign bonds into Bankia, and then raising the money by pledging those to the ECB. The Ministry said in a statement reported by Reuters and other outlets that: “The Economy Ministry maintains as a first option to go to the markets to recapitalize the entity.” Data out late Tuesday revealed Spanish retail sales fell by 9.8% in March, the biggest fall for a year.

The market gave its view of the Spanish denial and claims to be looking to raise money from credit markets by pushing yields on the country’s 10-year debt to an all-time high of 6.72%, all but shutting the country out of the markets it says it will approach. The euro fell to new two-year lows under $US1.24, ending in the US at $US1.2366, down around 2 US cents since late last week. Spain’s stockmarket fell to new nine-year lows overnight after dropping 2.6%.

Spain is simply too big to bail out, but it is big enough to leave the eurozone and survive with a new currency, unlike Greece.

Italy had a bond auction, yields rose, but importantly the country could only raise 5.73 billion euros, well short of the 6.25 billion it was seeking — a sign it is starting to be frozen out of the market. Yields on 10-year Italian bonds topped 6% for the first time since January.Australia got an unwelcome reminder of our vulnerability to Europe, not from the banks or financial markets, nor the falling dollar, but from falling commodity prices which staged a second nasty fall in a week to hit new multi-month lows. US oil prices fell under $US88 a barrel, Brent oil prices in London (the key global marker price) dropped to around $US103 a barrel, copper prices fell nearly 2.5% and the prices of other commodities eased or traded sideways. Copper prices are now 2% for the year after the fall overnight — they had been up 12% in February. The price of wheat rose as drought in growing regions in the US, Argentina, the Ukraine and Kazakhstan pushed prices higher). Gold prices rallied, surprisingly, in mid to late trading after falling in Asia and European trading.

Key commodity indexes told the story. For example, the energy heavy Reuters Jeffries CRB index fell to its lowest level since September 2010 in the US overnight. It’s dropped more than 10% since January, dragged down especially by lower oil prices which are now at six-month lows (when will we see the benefit here?). It is also down 40% from its peak in July 2008. Thermal coal prices are now well under $US95 a tonne in the Newcastle spot market, spot iron ore prices in the Chinese market are under $US135 a tonne, the lowest for 2012 so far, and the share prices of major miners and commodity groups such as Glencore, BHP Billiton, Rio Tinto and BP and Shell declined for yet another day. The falling value of the Aussie dollar will soften some of the impact in the drop in global prices, but not by much.

And finally, the story of the crisis, expressed in a more human way via a different type of oil. Figures out this week confirm that olive oil consumption in Spain, Italy and Greece has fallen as the economic crisis has deepened. That’s despite a sharp fall in prices because of the fall in sales has boosted stocks on unsold oil (which won’t last) and Spain has had a record harvest.

Reuters and FT reported that Spanish consumption this year is projected to be no higher than it was in 2002, while Greece and Italy will see consumption levels down at 1995 levels. Olive oil prices are now back at levels last seen in 2009 in those three countries. Prices of extra virgin oil in Italy are off 38% so far in 2012.

That’s the real story of the crisis: people in Spain, Greece and Italy are being forced to cut consumption, or move to cheaper oils (such as canola or sunflower) to cut their living costs as income falls, jobs disappear and economies contract. That will continue.

The national bank of Greece warned overnight that if the country left the euro, national income would fall by up to 55% (more than halving the size of the economy). It’s no wonder two of the world’s major insurers of trade finance have stopped writing policies for imports into Greece in the past few months. If the country leaves the euro, imports will plunge, led by energy and pharmaceutical drugs.

Peter Fray

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