Spain drags European markets lower

European markets are seen heading into the close in a distinctly negative position.  Continued uncertainty over Spain’s finances and a possible bailout have resulted in the FTSE 100 looking set to close with the biggest weekly loss since June.

A very disappointing end to a strong quarter as fund managers booked profits on stocks that have rallied over the past three months. Banks across Europe fell 1.5% today, after increasing over 15% in the third quarter following ECB President Draghi’s promise to do ‘whatever it takes’.

Looking at the broader markets the FTSE 100 closed down 0.65% whilst the DAX dropped over 1% and the CAC suffered a huge drop of over 2.4%.

It seems like the focus has been on Spain for quite some time now and with the results of their bank stress test due at 6pm central European time, Spain remained very much at the forefront of investors’ minds throughout the session.

The Spanish government agreed to the tests of the banks’ stability as part of the €100 billion  bailout of the sector in June. The results will show the individual needs of 14 banks tested, and the total is expected to be within a range of €60 – €70 billion. Traders will be looking closely to see where the total figure actually ends up. If it is much lower, the credibility of the test will be questioned; if it is much higher, the market will start to be very alarmed.

Added to these concerns over the stress test results, Moody’s Rating Agency is also expected to reviews Spanish debt at any moment now. It is possible that it could be reduced to junk status and this happening after the stress test results will be symbolically very damaging to the country. A result we could expect to see is the borrowing cost being driven higher and investors looking to reduce the risk in their portfolios. In reality we will probably see Moody’s downgrade Spain on any request for a formal bailout or if the bank recapitalisation needs declared later today are above the expected range.

From Monday we will be entering a new quarter. The previous quarter saw rallies stemming from central bank stimulus measures, however, in order for any further sustained rallies, strong corporate earnings and positive economic data are an absolute must.