Spain leads Europe higher whilst UK financials suffer downgrades

<p>European markets steadily climbed higher in early trading on Tuesday, adding to the impressive gains of the previous session, which saw the FTSE 100 close […]</p>

European markets steadily climbed higher in early trading on Tuesday, adding to the impressive gains of the previous session, which saw the FTSE 100 close up 1.4% following strong manufacturing data from the US.

This morning the positive sentiment across Europe stems from increasing expectation of a bailout request from Spain, possibly as soon as next weekend. It was originally thought that Spanish First Minister Rajoy would wait until after 21st October following the elections in his home region of Galicia but after a little hesitation in previous weeks, Spain now appears to be ready to request aid.

In a dramatic U -turn Germany is now signalling to stall Spain, as Merkel is not keen to put further individual bailouts in front of her increasingly reluctant Parliament.

The Spanish government has said it would enact 43 structural reforms over the next six months, whilst Brussels says this goes beyond what the commission had asked of Spain and so is fully confident that Spain would restore its economy to full health.

Such positivity has resulted in the benchmark Spanish government 10-year bond yield dropping to 5.78% and the Spanish Ibex rallying over 1% despite new figures showing that Spanish jobless claims rose 1.7% in September.

Here in the UK the FTSE 100 has managed to stay in the blue although only gaining a less impressive 0.1% and this is despite the fact that the UK economy has come out of recession according to the British Chambers of Commerce. Its survey of 7593 individual companies indicates that the economy grew by 0.5% between July to September after three consecutive quarters of contraction. Despite the positive data economic, however, performance remained weak and recovery would take longer than initially thought.

Financial stocks and insurance firms weighed heavily on the index today after UBS cut banks to ‘neutral’ from ‘buy’. RBS and Lloyds posted the biggest losses in early trading, down 2.9% and 3.1% respectively. Barclays also received the same treatment from UBS and consequently dropped 1%. Credit Swiss also lowered its rating on the European insurance sector, resulting in Prudential losing 0.8% and Standard Life shedding 1% early on in the day.

With a shortage of domestic economic data this morning and little data from the US this afternoon, investors will be watching any developments in Spain closely, and looking towards eurozone retail sales figures due tomorrow morning.

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