Are European sovereign debt fears starting to wane?

<p>The last few days have seen a marked improvement in investor confidence. Could European sovereign debt fears be taking a turn for the better or […]</p>

The last few days have seen a marked improvement in investor confidence. Could European sovereign debt fears be taking a turn for the better or is this just a passing phase, asks City Index Market Strategist Joshua Raymond.

Two indices that posted bad yearly returns in 2010 were the Spanish IBEX and Italian MIB. The IBEX fell 16.7% whilst the MIB posted losses of 12.7%. Compare this to the FTSE 100 and DAX, which both rallied 10% and 17% respectively, and it paints a fairly decent picture about the type of hesitant and risk averse sentiment existing over those peripheral nations within the eurozone. The big question remains over their ability to meet debt obligations without the need for a cash boost from the EU or IMF.

Fast forward to the last three to four trading days and both indices have made quite some ground on last year’s losses. The IBEX has rallied 11% from the lows reached on Monday, whilst the MIB has rallied almost 7% for the same period, with most of the energy behind these gains coming from buyer demand for shares in Spanish and Italian banks.

Spain’s IBEX charges higher this week

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Italian Mib follows suit

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Much of these gains have been triggered by successful Portuguese, Spanish and Italian bond auctions this week. A successful bond auction highlights the fact that those who bought into these bonds have enough confidence that when they reach maturity, they will get their money back.

This is a much needed and timely confidence boost for the region as a whole and also gives EU ministers a chance to sort the situation in a timely and efficient manner rather than a fast, rash and potentially ineffective way. Align these bond sales with comments from ECB President Jean-Claude Trichet for eurozone governments to pour more cash into the rescue fund set up for indebted states to tap liquidity fast and it boosts expectations that the next step in the situation is a swinging move towards solutions than any escalation in problems.

The deadline for a silver-lining solution could well be the EU summit in March, a point which German Finance Minister Wolfgang Schaeuble insinuated recently by promising a comprehensive new package of debt measures to be in place by the time of this summit.

So it would seem that in-roads have certainly been made this week. But let’s not get too far ahead of ourselves as there is every likelihood that a solution may not come in the form of topping up the rescue fund but elsewhere such as reducing interest rates charged for accessing funds, an idea that the EU’s key players France and Germany seem more willing to consider.

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