Markets drift lower as traders await Bernanke and concerns over Spain return

Traders in Europe are in a wait and see mood, seeing European markets drift lower in early trading on Wednesday, with the return to trading from the long Bank holiday weekend being slow and volumes remaining weak.

Investors are nervous to take up any new positions and are very much turning their focus to Friday’s conference at Jackson Hole in Wyoming, where they are hoping that US Federal Reserve Chairman Ben Bernanke will give further hints for easing action to boost the US economy.

ECB President Mario Draghi announced yesterday that he will not be attending the meeting due to a ‘heavy workload’. Many traders are taking this as an assumption that we could see a more detailed strategy for ECB bond purchase intervention at next week’s ECB meeting on 6 September.

The pressure will be firmly in place for the emergence of more details regarding any actions by the ECB particularly within the broader context of of Spain’s problems, which became more apparent yesterday with data showing the recession in Spain to be deeper than first thought in the second quarter. Add to this the fact that the regional Government of Catalonia would be requesting €5 billion from Spain’s liquidity fund and the picture in Spain is starting to look increasingly negative.

Catalonia represents approximately a fifth of Spain’s economy, yet there remains an additional issue of politics, with the state considering themselves diverse from the main government and are therefore likely to be somewhat stubborn on any political ‘conditions’ attached to emergency funds. This inflexibility could create levels of apprehension for future lenders to Spain, whilst also dealing a blow to Spain’s attempt to stave off a full scale bailout.

Fortunately for the moment European debt markets are stable. That said, traders will be looking at the results of the long term Italian debt auction tomorrow to gauge sentiment ahead of the ECB meeting next week.

‘Risk off’ is the main theme at present for many trader portfolios in the near term and for this reason the risk sensitive sectors in the markets such as the  banks and miners are the biggest fallers this morning. Rio Tinto has lost 1.7%, Anglo American 1.5% and Barclays has lost over 1.4% of its value.

Glencore and Xstrata, who both traded ex-dividend this morning, felt extra pressure at the hands of investors following news that Xstrata shareholder Norges Bank Investment Management has raised its stake in the mining company in order to join forces with Qatari Holdings to vote to block the merger between the two groups. Glencore topped the fallers list, shedding 2.4% whilst Xstrata lost 1% in early trading.

With no domestic economic data due this morning, focus will be aimed on German CPI and US second quarter GDP figures out this afternoon, which are expected to see US GDP revised higher to 1.75 from a preliminary reading of 1.5%.