Spanish bailout induced rally short lived for equity markets across Europe

An agreement by Spain and 17 EU Finance Ministers on Saturday night that would see Spain receive as much as €100bn worth of bailout funds to help strengthen its banks helped to ignite equity markets on Monday morning. However equity gains soon faltered as the session progressed, with early gains reversed and Spanish bond yields rising significantly.

By lunch time the FTSE 100 had rallied 43 points or 0.8% whilst the German DAX rose 1.79% and Spanish stocks received the strongest boost, helping the IBEX to rally over 4% in trading.

Yet by the time European markets closed, both the FTSE, DAX and IBEX traded into negative territory.

In the same breath the a rally of over 100 pips for the euro against the dollar fell back to Fridays levels whilst a 14 basis point fall in Spanish bond yields also reversed, with yields in fact rising over 20 basis points by late afternoon.

What we have seen today in European markets is a knee jerk reaction, pure and simple. Knee jerk reactions are typically short term in nature and indeed so it proved as afternoon trading showed.

Its important to note that the Spanish bailout is not a solution to the Euro or Spain’s own debt crisis. It is a plaster made of bank notes to help temporarily stop the problem exacerbating beyond control. Longer term fiscal surgery is required and it is over the next month we will start to hear of what form of surgery is to be applied following the results of Spanish bank stress tests.

The move lower in equities and quick reversal is not a rejection of the bailout by the market, its a recognition of the fact that its not a long term solution. Its a band aid.

To read more about what the Spanish bailout means, please see my latest blog piece ‘Another Domino Falls’.

From a sector perspective it is the banking and mining sector that had led the charge higher in London trading. The FTSE 350 mining sector rallied 1.7% by midday whilst the banking sector also saw gains of 1.5%. Lloyds Banking Group attracted much of the banking sector buying, with its shares rallying straight to the top of the FTSE 100 Index, gaining 3.4%, closely followed by Schroders. By the close of the session, banks had managed to hold onto their gains but the miners traded into negative territory.

Tesco shares fell 0.5% after the retailer reported 1.5% decline in underlying sales for the first quarter of the year with CEO Philip Clarke stating that whilst confidence had ‘not deteriorated, it had not gotten better either.’ Tesco shares remain suppressed following its shock profit warning from earlier in the year, and in the last week, its shares price traded back below 300p to hit its lowest levels since 2008.