FTSE starts the week with gains but Spanish questions remain

The FTSE 100 started the new trading week with gains of 0.7% thanks in part to buying in heavyweight mining stocks, though underlying questions remained about Spain and its banks, with benchmark 10-year Spanish bond yields rising to 6.5% today, another 15 basis points.

We have seen some short covering in both the euro and stocks alike this morning though much of the gains we have seen have been placed on short term contracts. The FTSE 100 has risen towards the 5400 level and the UK Index has failed to use this level as a platform to push on in recent weeks, suggesting that another failure at this level could open the Index to more losses as the week progresses.

That prospect is likely to be weighted in the relative success or failure of a heavy calendar of economic data due out this week, with the latest release of US GDP, global manufacturing and US jobs data likely to play a significant role in investor risk appetite.

For now however, with US markets closed for Memorial Day, and a lack of companies reporting or economic data out of Europe, investors have little to focus on apart from euro news headlines. With recent polls showing the pro-austerity parties are gaining ground in Greece ahead of the June 17 elections, this has helped to entice some short covering in the markets. This aligned with an increase in optimism that China could announce more pro business spending is also helping to increase buying into heavyweight mining stocks, and it is here where the engine behind the FTSE 100’s gains this morning can be located.

Underlying concerns remain over Spain’s ability to provide financial support to its banks after Bankia requested state aid of €19bn, in addition to the €4.5bn already provided by the Spanish government. Spain is likely to have to issue new bonds to help raise the amounts required to help bailout its struggling banks, which at a time when they are trying to reign in their fiscal deficit and bond yields are rising to unsustainable levels, poses a significant problem for Spain. The appetite of the ECB to get involved remains unknown given Mario Draghi’s recent comments that it is now the job of the governments to provide support, though we may get to a point where the ECB has little choice but to help. That stage is unlikely to be over the next few weeks but regardless, investors will continue to pay attention to headlines out of Spain today, particularly given the fact there is little else to focus on today. The Spanish IBEX fell 0.47% in trading, underperforming broader European Index gains.