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French connection

Money | The economic problems in Spain have crossed over the Pyrenees

Issue: "The GOP and Hispanics," May 19, 2012

Spain has been the most recent problem child in the European family. Unemployment is almost 25 percent, and Spaniards have rioted over the new center-right government's austerity measures. A Spanish bond offering in early April was a disaster, with so few buyers that Spanish officials had to offer high interest rates to sell what few bonds they did. A few days later, a second Spanish bond auction yielded slightly better results, but Spain's 10-year bonds still remain around 6 percent, near record-high levels. By comparison, the yield on a 10-year U.S. bond is less than 2 percent.

But the rain in Spain has now spread over the Pyrenees Mountains to France, and beyond. On April 19, rumors flew that Moody's would review France's AAA credit rating. The rumor was a shock, as France is supposed to be part of the solution to Europe's debt crisis. France, though, is also Spain's largest trading partner, and whither one goes, the other follows.

The downgrade rumor may have had a role in French elections, which took place the following Sunday and pushed center-right French President Nicolas Sarkozy into a runoff with a Socialist candidate. The next day, April 23, the Dutch government, one of the most vocal critics of European countries failing to rein in their budgets, resigned after failing to agree on a plan to bring its own spending under control. Global stock markets immediately plunged.

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Given that reaction, and the increasing frustration Europeans are showing with their leaders, the outcome of France's May 6 run-off could determine whether the rain in Spain was an April shower or the beginning of tornado season.

Earnings bonanza

Associated Press/Photo by Gene J. Puskar

Every month, scores of economic reports come out that can, if they say the right things on the right days, move the stock markets dramatically up or down. But four times a year, quarterly corporate earnings trump all of these reports. Earnings season kicks off with Alcoa, famous in finance circles for being the first major company to report its results each earnings season, usually in the second week after the end of the quarter. It's also a bellwether company, as aluminum consumption is highly sensitive to global economic forces. On April 11, Alcoa reported a surprising 9 cent profit for the first quarter. Analysts expected a 4 cent loss.

The markets moved sharply upward on the news, and Alcoa has indeed proven to be a bellwether. As the earnings season nears its end, corporate results have been substantially stronger than expected. Through the end of April, more than 70 percent of S&P 500 companies have beat expectations, according to Thomson Reuters data. Citigroup, Home Depot, Procter & Gamble, and Coca Cola all issued strong earnings reports.

But not all was well. The technology sector has been jittery. IBM missed its revenue forecast. Investors are also nervous about Apple, whose stock price was up as much as 40 percent since the beginning of the year. However, IBM's weak revenue and increasing competition for the iPhone and iPad cause analysts to wonder if Apple can maintain its growth.

Nonetheless, most analysts say the first quarter reports are good news and could lead to hiring and expansion by these companies in the months ahead. -Warren Cole Smith

Warren Cole Smith
Warren Cole Smith

Warren, who lives in Charlotte, N.C., is vice president of WORLD News Group and the host of the radio program Listening In. Follow Warren on Twitter @WarrenColeSmith.

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