European stocks gain ground on hopes of Chinese stimulus but soon reverse

European markets made a confident start to the trading day with positive sentiment inspired by gains in Asia following Chinese stimulus hopes, but pressure also remained firmly on Spain’s Ibex in the midst of struggling poor economic data and struggling Bankia, leaving gains open to reversal.

However, an afternoon rally sparked by speculation that the ECB could detail plans on bank recapitalisation helped to inspire traders towards the close and lift the FTSE 100 back from its days lows.

The FTSE 100 closed at 5391, posting a gain of 34 points or 0.65% but yet again failed to push through resistance between 5400 and 5420.

The Mining sector is almost solely responsible for leading the FTSE higher on optimism and speculation that more stimulus measures could be implemented to further fuel Chinese growth. Strong Chinese growth is particularly important as crisis hit Europe is China’s biggest export market and any damage to demand could quickly dampen growth prospects in China. And whats more, with mining stocks bearing a heavyweight influence on the FTSE 100, optimism for Chinese growth is likely to correlate with a beneficial performance of the FTSE 100 Index and so as a result, the FTSE 100’s prospects are weighted to a degree in China’s ability to kick start slowing growth. The optimism has encouraged traders to take on more risk in their portfolios all be it in a short term fashion. Kazakhmy and Rio Tinto are both trading over 2% higher.

On a negative note European banking concerns are still weighing on investors’ minds, preventing the markets from extending gains further and ensuring that most trader strategies have a short term focus. With regards to Spain, the IBEX continues to badly underperform broader Indices in Europe, struggling under the pressure of banking heavyweights and extremely poor retail sales figures which showed Spanish retail sales for April dropped a staggering 9.8% on an annual basis. This in addition to Spanish 10-year bond yields remaining elevated at 6.5%, just shy of the widely considered unsustainable 7% – the level at which an international bailout would be seen as necessary – is keeping Spain in the spotlight for all the wrong reasons. The Spanish IBEX fell over 2% yet again today to hit its lowest levels since March 2003, a 9 year low.

Still remaining with eurozone issues, investors continue to watch developments in Greece. With the elections drawing closer, polls suggest that pro bailout parties are gaining ground, giving the market hope that a Greek exit may not be as certain as possibly feared. With a potential Greek exit from the euro already digested by most investors in the markets, any pro bailout win on 17th June could see investors’ appetite for risk take a front seat. However, given the fragility of the political situation in Greece recently, investors are refraining from acting until election clarity is received, whilst.

The afternoon gains came in spite of US consumer confidence badly disappointing. US consumer confidence for May fell to 64.9 from a downwardly revised 68.7, with expectations of a small rise to 70.0. Despite initial share price falls in reaction to the confidence numbers, stocks still managed to climb into the close.