A cautious tone to trading as European worries still hang over the markets

European markets traded cautiously higher on Tuesday in yet another choppy trading session dominated by headlines out of the eurozone. 

The markets looked to stabilize after a choppy previous session which saw the FTSE reach highs of 5536 following the news of the Spanish bank bailout, however that optimism failed to last with equity markets reversing yesterdays earlier gains whilst today any gains are being capped by concerns over the June 17th elections in Greece and increasing unease regarding Italy.

The FTSE 100 closed higher by 41 points having traded as low as 5414 with just over an hour to go into the close shows just how choppy trading was today with Spanish 10 yr bond yields hitting yet again record highs of 6.85%.

Despite initial cheer in the previous session with the agreement by eurozone finance ministers to lend Spain 100 billion Euros to prop up its banks, investors have now fully digested the news and are concerned that the implementation of the package is likely to add to rising public debt in the country. This is additional to the fact that elections in Greece are looming ever closer, which many are hailing as determining the fate of the single currency and this is keeping any “risk on” trade short term at present.

A further cause for concern is the speed with which investors have switched their attention to Italy as the next source of unease and this only goes to highlight that the contagion effect continues regardless of bailouts. As the episode drags on, there is a real need for a line to be drawn under the entire messy eurozone affair, and investors are seeing straight through temporary patch ups solutions much more quickly today than perhaps a year ago. Any form of market recovery is unlikely to happen until a long term fiscal solution is implemented and this will likely be born out of a greater fiscal union both of the eurozone and its banks.

In the UK, the banking sector is pulled the FTSE 100 higher with gains of over 1% and Lloyds rose 2.7% on the day. Also on the leader board was defensive stocks such as Tobacco firms with British American Tobacco and Imperial Tobacco both gaining as investors look to balance their portfolios in times of uncertainty. The fact we have defensive stocks helping to push the FTSE higher today reminds that one should not take the FTSE’s rise this morning as a sign that investors are seeking out risk.

Economic data is of high importance as we progress through the week, with weak figures from UK Manufacturing and Industrial production being released this morning. The worse than expected data highlights the struggle which the UK is experiencing to get the economy ignited again, particularly whilst the UK’s major trade partner, Europe, is suffering a trade debilitating debt crisis.