GLOBAL STOCKS and the euro recorded solid upward moves yesterday as expectations grew for further stimulus measures from the world’s central banks in response to the euro zone debt crisis.
Even yields on peripheral euro zone government bonds retreated, in spite of concerns that the rising cost of funding for Spain was driving the country inexorably towards a full-blown sovereign bailout.
Madrid managed to raise slightly more than €3 billion in a sale of short-dated debt, at the upper end of the target range, although yields at the auction jumped sharply – signalling that markets were increasingly concerned about Spain’s near-term solvency position, said IHS Global Insight economist Raj Badiani.
“This is a concern given that Spain faces a busy debt issuance schedule in the second half of 2012, while financial risks are even more acute in 2013.”
Jonathan Loynes at Capital Economics acknowledged yesterday’s dip in Spanish secondary market yields, but said their broader upward trend in recent days underlined the fact that its bank bailout, unveiled last week, would not address the country’s broader fiscal problems.
“The government’s forecast for the budget deficit to fall to 3 per cent in 2013 rests on a return to positive GDP growth next year, which looks very unlikely,” he said.
“In short, it now appears virtually inevitable that Spain will require a sovereign bailout – possibly very soon.”
But such worries did not prevent Spain’s 10-year government bond yield sliding 11 basis points to 7.06 per cent yesterday, and falling further towards the 7 per cent level in after-hours trade, according to Reuters data.
News that LCH.Clearnet had raised margin costs for trading most Spanish bonds came too late to have any impact on prices.
The yield on Irish nine-year bonds fell by 0.063 per cent to 7.334 per cent.
The Spanish and Italian equity markets also enjoyed a strong rebound, rising 2.7 per cent and 3.4 per cent respectively and outperforming the broader FTSE Eurofirst 300 index, which gained 1.6 per cent.
In New York, the SP 500 was up 1.1 per cent at midday, and the Vix index – Wall Street’s “fear gauge” – was down 3 per cent as the market looked beyond the euro zone’s problems to the conclusion today of a US Federal Reserve policy meeting.
A recent deterioration in US economic data has led to talk that the central bank could announce a new asset purchase programme.
Philip Marey, senior US strategist at Rabobank, suggested the Federal Reserve would probably prefer to wait and see how data evolved in the coming months rather than act at this stage, but he said it could extend its current asset purchase programme, Operation Twist.
Meanwhile, chances of the Bank of England sanctioning a further round of quantitative easing appeared to increase as data showed UK consumer price inflation falling to its lowest rate in 30 months.
There were also growing expectations that the European Central Bank could cut interest rates next month amid increasing signs that the recession in the euro zone in 2012 could be worse than feared. – Copyright The Financial Times Limited 2012
