Spanish Government Bond (10-Year) Made Record High
Global equity markets came under pressure for a third session as lingering concerns about the eurozone debt crisis outweighed signs of improvement in China’s manufacturing sector.
Investors continued to focus on the prospect of Spain requiring a full sovereign bailout as its government bond yields stayed at levels viewed by many as unsustainable.
The debt-laden country was forced to pay more to borrow in a €3bn auction of short-term government debt yesterday.
The Spanish debt auction came just hours after Moody’s lowered its outlook on triple A-rated Germany, the Netherlands and Luxembourg.
The rating agency said late on Monday night that it had moved the outlook on all three countries from “stable” to “negative”, reflecting the increased risk that Greece might exit the euro and growing expectations that troubled countries such as Spain may need greater financial support from the eurozone core countries.
Ten-year Spanish bond yields rose to a euro-era peak of 7.62 per cent.
Rome’s borrowing costs were also elevated, with the 10-year yield rising 23 basis points to 6.56 per cent – the highest level this year – as stocks in Milan touched a euro-era low.
And the recent strength of German government bonds showed signs of running out of steam following Moody’s action, with the Bund yield rising 6bp to 1.24 per cent.
By contrast, demand for US Treasuries remained solid, with the 10-year yield slipping a further 3bp to 1.40 per cent.
Evidence that the eurozone economy was struggling for traction came in the shape of Markit’s eurozone composite purchasing managers’ index, which showed that the region’s private sector contracted in July for a sixth successive month.
“Risks of a deep recession in the euro area have increased and the manufacturing sector is badly hit by diving foreign demand,” said Annalisa Piazza at Newedge Strategy.
Chinese Boost Not Enough
There was a glimmer of hope on the macroeconomic front in China, however.
A survey yesterday showed that manufacturing sector activity in the country was at its strongest level in five months, a result that supported the Shanghai stock market, which gained 0.2 per cent.
However, the improved tone did not spread to other equity markets. “Better than expected manufacturing data from China lifted the mood but only had a shortlived impact on global markets,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange.
The FTSE All-World equity index, down more than 3 per cent since last Friday, fell 0.8 per cent.
On Wall Street, the S&P 500 was 1.4 per cent lower at midday, weighed down by poorly received results and guidance from UPS and Texas Instruments.
One of the highlights of the US earnings season was expected after the close of trading, with Apple’s earnings release.
In Europe, meanwhile, the FTSE Eurofirst 300 shed another 0.6 per cent.
On currencies, the euro resumed its downward trend and by midday in New York was 0.4 per cent lower against the dollar at $1.2061 – a fresh two-year low.
Meanwhile, the dollar index, often watched as a gauge of broader investor tension, was down 0.1 per cent.
Initial strength in industrial commodities – usually closely correlated to the outlook for future Chinese demand – faded as the global session progressed.
Copper reversed an initial advance to trade 0.6 per cent lower at $3.36 a pound.
Oil prices were little changed, with Brent crude trading fractionally higher at $103.30 a barrel.
Gold was a shade lower, with the precious metal trading down 0.1 per cent at $1,575 an ounce.