Having traded quietly throughout the first half of the European session, the euro sold off aggressively after the EU conference call on Spain came to an end. Although Spain’s bailout plan was officially approved by the EU, the concurrent rumor that Valencia, Spain’s third largest city will seek help from the Spanish government sent the euro plunging. While Valencia’s government later denied doing so, the damage was done. Investors realize that the bank bailout will not mean the end of Spain’s troubles. Too little too late is the problem because the market is now pricing in the possibility of a full sovereign bailout for Spain, especially now that GDP growth for 2013 has been revised down to -0.5 percent from +0.2 percent. According to the statement released by the Eurogroup, the Spanish bailout will be transferred to the ESM without gaining seniority status and the Memorandum of Understanding outlining the conditions of the aid will be signed in the coming days. Spanish 10 year bond yields rose above 7 percent this morning to come within a basis point of its record high. Italian bond yields increased sharply but the killer is the decline in the Spanish and Italian stock markets, which are both down more than 3 percent this morning. With no major U.S. economic data on the calendar, Spain is causing all of the trouble for the currency and equity markets – Dow futures are pointing to a lower open.

Canadian consumer prices is the only piece of North America data on the calendar and according to the report, inflationary pressures in Canada eased in June. CPI dropped for the second straight month by 0.4 percent and core prices fell the same amount. While annualized CPI growth ticked up to 1.5 from 1.2 percent, it is hard to believe that the Bank of Canada is talking about raising interest rates when manufacturing activity is contracting and inflationary pressures are easing. Based on the price action the Canadian dollar, which fell sharply after the CPI report, many investors are also skeptical about how long the BoC can remain hawkish.

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