Europe’s Hydra Returns

Europe, the crisis that just won’t quit, grows another head.

The Eurodollar is falling hard today, down 0.9% to $1.1272 and it’s ETF, CurrencyShares Euro Trust (NYSEARCA:FXE) was off 0.83% approaching lunch hour on Friday in New York.

European indexes were down hard with the DAX dropping 1.7%, the FTSE 100 off1.1% and the Stoxx 50 declining 2.7%.

Major European ETFs also declined with iShares Germany Index (NYSEARCA:EWG) off 2.7% and iShares MSCI Spain Index (NYSEARCA:EWP) plunging 6.5%.

Today’s angst in Europe was triggered by a new head on the hydra in Spain, this time a region, Valencia, saying that it would need help from the central government of Spain which, of course, has its own financial difficulties. Spain remains in recession with unemployment at depression levels of 25%.

The problem won’t be contained to Europe, of course, and that was evident in today’s earnings news from General Electric with earnings down 18% with Europe dampening its business.

Spanish bonds hit records with its 10 year yield breaching the unsustainable 7% level while German two year bond yields remained below 0%.

So now we not only have “bad banks” in Spain, but “bad regions,” as well.

Farther down the Mediterranean, Greece remains in difficulty as the European Central Bank said that Greek bonds are ineligible to be used as collateral and the 10 year yield jumped to more than 25%.

Italian bonds also rose, hitting more than 6% for the 10 year yield in Friday’s trade.

U.S. stocks slumped on the news with the Dow Jones Industrial Average (NYSEARCA:DIA) and S&P 500 (NYSEARCA:SPY) both down approximately 0.6% in mid-day Friday trade.

European finance minister signed off on a plan to bailout Spanish banks for $120 billion today which everyone hopes will ease some of the stress in Spain.

Bottom line: Europe continues to stress world markets while central banks grapple with the ongoing crisis. Expect more volatility ahead.

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