The Pain in Spain: A Turn for the Worse

May 9th, 2012

by Doug Short

Last month I posted an overlay of Spain's benchmark index, the IBEX 35 and the S&P 500. Today's news that the Spanish 10-year yield closed north of 6% prompted me to take another look at the IBEX. The index closed the day with a loss of 2.77%, setting a new low, 57.28% off its 2007 high -- fractionally below the -57.25% trough on March 9, 2009.

Here is an update of the overlay.

Interestingly enough, both set a closing low on the same day, March 9th 2009, and the percent of decline was nearly identical. Likewise their recoveries over the next 18 months were quite similar, although the IBEX was the more volatile of the two.

But in the late summer of 2010, the two indexes parted company. The divergence dates from approximately the date of Chairman Bernanke's speech at the Fed's 2010 annual symposium in Jackson Hole, Wyoming (August 27, 2010). Bernanke strongly hinted at the forthcoming Federal Reserve intervention that was subsequently initiated in November of 2010, namely, the second round of quantitative easing, aka QE2. The US markets responded with a sustained rally that ultimately topped out in April of 2011. The selloff that followed (a near cyclical bear decline of 19.39%) reversed shortly after the announcement of Operation Twist on September 21st. For more on the Fed intervention, see this commentary and the chart below.

Alas, the Spanish market has not enjoyed comparable government intervention.

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