European markets lose ground on Spain worries and Fed disappointment

European stock markets look to be breaking a three-day winning streak this morning as they track losses from Asia and on Wall Street. Disappointing comments by the Federal Reserve Chairman last night meant that investor’s attention swung back to Spain’s recent downgrade, and the prospect of slower economic growth in Germany.

By mid morning the FTSE had shed 1% of its value as investors looked to lose riskier assets from their portfolio. A lack of a clear signal from Federal Reserve Chairman Ben Bernanke on further quantative easing lead to a sell off in oil and metal futures which translated to a broad sell off in the mining sector and energy stocks. Vedanta shed 5% and Rio Tinto over 4.5% whilst BP saw a drop of 1.4% in the value of its shares.

Investors were looking for a much stronger indication from the Federal Reserve that they would take imminent action to protect the US economy from the eurozone crisis, especially considering the non-farm payroll data was the weakest it has been for a year. The disappointing comments overshadowed any initial positive reaction the market had to a surprise cut in Chinese interest rate.

Yesterday afternoon the People’s Bank of China delivered the much awaited rate cut of 0.25 basis points, which was met with an initial rally. However as the news has sunk in investors have become slightly suspicious of the timing of the release of this news. The PBOC does not set dates for its policy announcements, it does them when it considers best. The cut was expected after the weekend when a barrage of important economic data will be released from China. The fact that the cut has come prior might suggest some level of emergency.

This morning with investor’s was attention firmly back on the eurozone and particularly Spain and how it can solve its banking crisis. Spain is expected to request European aid for its banks this weekend and figures between 40 billion to 100 billion Euros are being suggested as the required cash injection. Adding to this, yesterday Spain received a downgrade from rating agency Fitch from A to BBB with a negative outlook. This rating is only one rank higher than “junk” status. The banking sector here in UK has reacted badly to this news with RBS and Barclays both shedding over 2%.

Other negative news continued to pour out of the eurozone adding to concerns, as flagging demand from the eurozone caused a big drop in German exports and imports in April and UK PPI data came in slightly worse than expected. Germany has been a growth driver for the eurozone however recent data released has shown that even the European powerhouse is not immune from the crisis.