FTSE fails to hold onto gains despite Spanish formal bank aid request & Chinese data

<p>A formal request from Spain for bailout funds to recapitalise its banks and positive data out of China helped to lift European markets early on […]</p>

A formal request from Spain for bailout funds to recapitalise its banks and positive data out of China helped to lift European markets early on Monday but gains were soon reversed in choppy trade to leave the FTSE close to flat by the close.

The FTSE 100 rallied 17pts to briefly breach the psychologically important 5900 level but a sell off from this level of resistance is yet again something that needs to be watched. A failure to break above 5900 soon could prevent the FTSE 100 from enjoying a ‘santa rally’, whilst a sell off below 5860 and 5800 could indicate a potential correction of 3%-5%. The sell-off in late trading was more of a technical reaction than fundamental.

A weaker than expected release of US ISM Manufacturing also weighed on trading in the afternoon, with the manufacturing measure dipping back into contraction territory surprisingly.

Today, Spain formally requested the release of €39.5bn of European funds to recapitalise its banks at around 12th December. The formal request is nothing of a surprise of course given the fact the country had already informally request bailout funds for its banks. Spain will auction up to €4.5bn worth of bonds on Wednesday so it will be interesting to see whether after the formal request the country can enjoy a similarly successful auction to last month’s auction, which was well subscribed. My hunch is the formal request provides further clarity and this could be well received by investors.

False euro rally?
Interestingly enough, the euro rose sharply in the immediate aftermath of the announcement, which to me appears likely that many investors mistook the announcement as a formal sovereign bailout request. That knee jerk reactive move was quickly corrected however. Many in the market are taking clarity around the Spanish fiscal situation in their stride currently, particularly considering the time of year and the fact stock indices have performed well of late.

Greek bond buyback
The announcement of a Greek bond buy back was also seen as supportive for the euro today, with Greece looking to buy back as much as €10bn worth of debt. The move is seen as a positive sign of Greece’s dedication to reduce their debt burden but needs to be taken with a pinch of salt. This is a step in the right direction but the road remains long and exhausting.

China data breaks the bearish trend
Better than expected manufacturing data out of China early this morning also helped to improve risk appetite in London trading for the morning session. The measure reached 50.5, which was slightly better than expected and also marks the first improvement in manufacturing for China in 13 months, breaking an important bearish trend. The improvement created a typical knee jerk bullish reaction in mining stocks, with the sector rallying 0.9% early on, giving heavyweight support to the FTSE 100 before the afternoon reversal. Vedanta Resources and Kazakhmys were amongst the top gainers on the day as a result, with their respective share prices rallying over 1%.

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