Roller coaster day for stock market as investors weigh up sovereign debt picture

Stock markets across Europe endured a roller coaster day with Indices swinging widely between small and heavy losses on Tuesday as investors jostled between deep concerns that Italy and Spain may be dragged into the sovereign debt crisis along with desires to short term bargain hunt.

At one point the FTSE 100 lost 2%, whilst the Italian Mib, German DAX and French CAC lost between 3% and 4%, emphasising the sheer weight of concern that investors have displayed over the uncertainty of the Italian and Spanish debt situation. The fact that Italy was due to entertain a short term bond auction this morning merely exacerbated that uncertainty earlier in the day too on fears that buyer demand may be severely weak.

However, a successful auction on strong demand, albeit at a high cost, helped to calm some of those fears and trigger a recovery for much of European stock indices, which rallied throughout the afternoon to trade at lower loss into the close. The FTSE 100 retraced to losses on the day of around 1% whilst the Italian Mib swung from a 4% loss to a 0.8% gain on the day, a sharp turnaround which tells more about the uncertainty and heightened tensions surrounding the country at the moment than an immediate positive change in sentiment.

Italy managed to sell €6.75bn of 12 month bills with a gross yield of 3.67%. The yield was sharply higher than the 2.147% premium for the last round of 12 month bill auction, which emphasises the growing risk premium the market is applying to Italian bonds in the midst of their debt uncertainties.

More volatile equity moves could however come on Thursday when Italy auctions off €5bn worth of fixed rate bonds as well as 5 and 15 year debt, whilst JP Morgan and Google announce their second quarter earnings to the market.

Today. investors remain in risk off mode, with the riskier asset classes such as the heavyweight miners, oil firms and banks all weighing on Indices. These three sectors all traded lower by 2% in early London trade before an afternoon rally reduced the losses on the day for all three sectors to 1%.

Traders will also keep a firm eye on tonight’s FOMC minutes release to gauge for any clues as to how the Fed might position themselves in the immediate term to stave off a slowdown in the US economic recovery, a factor heightened by the shockingly weak US jobs data last Friday.