European stocks rallied to within a whisker of their highest levels of the year, with Spanish and Italian equities in particular attracting demand.
Madrid’s Ibex 35 index gained more than 4 per cent and Milan’s FTSE MIB rose almost 2 per cent as stock markets in the eurozone’s periphery responded to moves in sovereign bond markets, where the cost of borrowing for the Spanish government has been falling all week.
Spanish government debt continued to rally yesterday, with yields on 10-year bonds, which move in the opposite direction to prices, falling 11 basis points to 6.47 per cent. That marked the first time Spain’s long-term cost of borrowing has fallen beneath 6.5 per cent since July, according to Bloomberg data.
However, Italian yields rose 3bp to 5.77 per cent. Spanish and Italian bonds have tended to move in tandem this year.
“European authorities have been clear that they must firewall Spain should Greece have to exit the single currency,” said Quincy Krosby, a market strategist at Prudential Financial.
“Investors are expecting a concrete plan of action for Spain, while there is less urgency about Italy. That means the short-term trade favours Spain.”
But, in a sign of continued nervousness among eurozone bond investors, German debt – a favoured haven – still found buyers. The Bund yield fell 4bp to 1.52 per cent, although this represented a significant rise from the levels beneath 1.2 per cent that were reached in mid-July. The premium that Spain and Italy have to pay over Germany to borrow in bond markets has narrowed appreciably, although it remains about 5 per cent for Spain.
Elsewhere in equity markets, the S&P 500 moved into positive territory for the week, and within a few points of a post-financial crisis high. It closed 0.7 per cent higher.
The CBOE’s Vix index, which measures expectations of short-term volatility, fell further beneath 15, a level generally seen as an indicator of calm among investors.
However, Vix futures suggested the index would climb back to 20 by October, as investors return from summer holidays.
In China, the Shanghai Composite lost 0.3 per cent as data showed foreign direct investment dropped to a two-year low in July.
That appeared to outweigh reports that Wen Jiabao, China’s premier, had said recent data gave the government room to ease monetary policy.
In currency markets the euro climbed against most major currencies except the Swiss franc.
The single currency was up 0.5 per cent against the dollar to $1.2356. Sterling also rallied against the dollar, to $1.5738, as UK retail sales data for June were revised sharply upwards.
However, the Australian dollar fell slightly against its US counterpart, which some analysts put down to a reduced likelihood that the Federal Reserve will announce further quantitative easing at its September meeting.
“Economic data have kept the option [of further easing] just about on the table. . . however, the commodity currencies don’t appear to be buying it,” said Michael Hewson, a senior markets analyst at CMC Markets.
The dollar’s weakness against other currencies may have helped push up gold, which climbed $11 to $1,613 an ounce.
Commodity markets seemed to respond to the hint of further monetary easing in China. Copper climbed 1 per cent to $3.38 a pound, while Brent crude rose 65 cents to $116.90.
In government bond markets, the 10-year US Treasury yield rose 2bp 1.84 per cent. Brazilian bond yields barely rose, in spite of the government’s announcement of a $66bn stimulus plan.
The government said the plan would be funded on favourable terms from the state development bank.
22nd August 2012
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[...] stocks fell from multi-month highs in light trading amid divergent newsflow from Europe on how policy makers planned to address the [...]