In Europe: Spain concerns puts brakes on European share rally

29 May 2012

Markets desperate for something to cling do, Spain’s financial sector concern offers precious little.

European shares pared back gains on Tuesday as heightened concerns over prospects for Spain’s banking system capped early optimism over the possibility of further stimulus measures in China.
The FTSEurofirst 300 index was 0.2 percent firmer at 986.36 by 1131 GMT, well off a session high of 993.28. cSpain’s IBEX, meanwhile, was once again the regional laggard, down 2.6 percent and floundering at nine-year lows.  Spanish 10-year bond yields remained at elevated levels around 6.5 percent, pressured by indications Madrid will recapitalise nationalised lender Bankia by issuing new bonds and stoking fears the country will no longer be able to afford to fund its debt.
Benchmark borrowing costs above 7 percent are widely seen as unsustainable and could force Spain to seek an international bailout, as did Greece, Ireland and Portugal. “Credit markets aren’t believing this equity market rally. The equity market is trying to hang on to any positive news, but the credit markets have ticked up over the last couple of days,” Joe Rundle, head of trading at ETX Capital, said.
Optimism that China, whose biggest export market is crisis-hit Europe, may soon launch a stimulus programme, helped propel markets higher in early trade, but this gave way to worry about Spain as investors focused on the surge in the country’s borrowing costs.

“You cannot be too short this market,” Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets, said. “If a massive amount of liquidity gets into markets, we know that it can be temporary.” Mining stocks contributed to the market’s earlier solid gains on unconfirmed talk that Beijing was readying a fresh round of fiscal stimulus, but this was knocked back later by Chinese media reports.

Questions about Greece’s future preyed on investors’ minds ahead of next month’s election, although weekend polls that showed pro-bailout parties gaining ground eased some concerns about the possibility of the country’s exit from the euro zone. “In the event of a Greek exit we see the market having a sharp sell-off then rebounding quickly as much of the bad news is now priced in,” Atif Latif, director at Guardian Stockbrokers, said.
“The chief concern is now uncertainty and the lack of information on how to best avoid wider contagion issues and to maintain growth levels.” U.S. economic figures could help distract investors jaded by worry about euro zone debt, with ADP, ISM and non-farm payrolls
highlights later in the week.


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