Banks lead stock indices lower

Bank share prices dropped across Europe on Monday, dragging stock indices lower by between 1.3% and 1.9%, as concerns weighed over potential capital raising and exposures to sovereign debt.

Debt concerns has evolved from a European issue into a global economic problem with the US seemingly at deadlock on raising the debt ceiling, whilst there remains deep concern in Europe over an escalation in the sovereign debt situation with big question marks over Italian and Spanish debt. The reaction in the bond markets today, which saw 10 year yields for both Italian and Spanish bonds hit 6% and 6.34% respectively, indicating the growing unease over the sovereign debt situation in Europe. This has had a correlated negative impact on the major European banks, where the recent publication of the stress tests results did little to dampen existing fears over exposures to the eurozone debt and a potential default. Lloyds Banking Group, Barclays and Royal Bank of Scotland have been hit the hardest in the UK session, with all bank shares off by 6%-7% on the day, locking in a very disappointing start to the new week.

It’s hard to imagine that with two weeks to go until the 2nd August deadline US politicians would fail to agree to raise the debt ceiling. But certainly with political games being played out and the Republicans attempting to hold the White House to ransom, anything is possible.

We have two Spanish bond auctions due out tomorrow, where they will auction 12-month and 18-month bills, and Thursday, where they will auction 10-year and 15-year bonds. This will give investors another opportunity to gauge market confidence in the troubled country and even if demand is high, the premium paid could be fairly high. We also have the talks over a second bailout for Greece to come this week amongst eurozone finance ministers also, and whatever the result is of these talks, the markets will watch for reactions from credit ratings agencies closely.

The miners have also seen heavy selling, with the mining sector losing 1.7% in trading as a result. Copper prices have lost 0.6% on the day, being pressured by the stronger US dollar, which is being favoured by investors in ‘risk off’ mode. The price of crude oil fell by nearly 2% on the day too, and this compounded weakness in the energy sector, with Royal Dutch Shell and BP both seeing weakness on the day.

Gold hits record highs
The price of gold hit new record highs today as investors continued to demand the precious metal on global economic concerns and inflationary pressures. The price of gold hit a new high of 1607.78 on the day. Gold continues to trade with a bullish bias and whilst the concerns over global state debt remains entrenched in investor mentalities, any escalation in the situation such as a default, or announcement of a third phase in quantitative easing in the US, may give rise to gold hitting the stellar $2000 level at some point in the medium term.