For months now, the intelligencia on Wall Street have said that Greece is a "sideshow" and what really matters in Europe is what happens to Spain and Italy.
Well, Spain took a very bad turn over the long holiday weekend and yet financial markets seem focused on a little bit of good news from Greece, at least for the moment.
Major stock proxies rose around the world overnight while U.S. averages were higher in early trading Tuesday morning. Stocks got a boost from renewed hopes about stimulus from China and Philadelphia Fed President Charles Plosser tells The WSJ "there's absolutely no reason for people in the United States to get all in a dither" about Europe.
Still, the action seems disconnected from news out of Spain. On Friday, the government was forced to effectively nationalize Bankia, its third-largest bank. Spanish bond yields surged to euro-era highs and bank stocks tumbled on fears more bailouts will be necessary, even as Prime Minister Mariano Rajoy declared Spain will not ask for funds from the EU (or IMF).
Given Spain's banks are sitting on an estimated $227 billion in bad real estate debt and Spanish unemployment is 24% there is "plenty of skepticism over Madrid's insistence that it will rescue its faltering banking sector without outside support," The FT reports.
Adding insult to injury, the Spanish government reported retail sales fell 9.8% year-over-year in April, the biggest monthly drop on record.
As Henry and I discuss in the accompanying clip, Spain seems to be following the same path of Greece, Portugal and Ireland before it. In other words, things are likely to get worse before they (hopefully) get better -- or spread to Italy, where the CEO of Intesa Sanpaolo, the nation's largest retail bank, expressed pessimism about the outlook for the rest of 2012.
But for the moment, market players seem to be focused on the good news out of Greece, where banks received a long-awaited package worth about $22.5 billion from the European Financial Stability Facility (EFSF).
In addition, the conservative New Democracy party is rising in the latest polls numbers while support for the radical Syriza party has slipped. A victory by Syriza in the June 17 election would be viewed as a rejection of the euro so New Democracy's improvement in the polls is welcomed news.
To be clear, financial markets don't have to make logical sense -- and often do not -- and the stock market is not telling the same story as the currency or bond markets, which seem genuinely concerned about Spain. At the moment, the stock market bulls seem to be either willfully ignoring the news out of Spain or betting it's bad enough to get the EU and ECB to crank up the bailout machines, yet again.