Successful Spanish bond auction lifts markets; Tesco shares plummet; BoE keeps rates/QE on hold

<p>A successful first Spanish bond auction of the year helped give stocks a fillip to push higher, but gains were kept on a leash ahead […]</p>

A successful first Spanish bond auction of the year helped give stocks a fillip to push higher, but gains were kept on a leash ahead of the European Central Bank rate decision due out at 12.45pm GMT. UK retailers however came under pressure after a dreadful trading performance from bellwether Tesco over the Christmas period. The Bank of England kept rates and QE levels on hold as expected.

By noon, the FTSE 100 had rallied 21 points or 0.38%, though it was underperforming a stronger European session that helped the DAX (Germany 30) and CAC (France 40) both rally over 1.3%.

Financial markets across Europe opened tentatively as traders awaited the results of the Spanish bond auction and respective rate decisions from the ECB and BoE. However, stock markets received a lift when it became clear that Spanish bond auctions progressed well, with average yields falling across the board, indicating that investor fears over an escalation in the sovereign debt crisis and Spain’s ability to meet its lenders may have calmed somewhat over the last month.

The bond auction saw Spain sell bonds expiring in April 2016 at an average yield of 3.748%, down from 4.871% last time, whilst the October 2016 expiry also saw yields fall to 3.912% from 4.4848%. Whilst this auction is not indicating the end of the crisis, it does breed some muted confidence into the markets that perhaps investors are not entirely risk averse, giving stocks a lift. Focus will now switch to the longer term Italian bond auction tomorrow.

BoE keeps rates and QE on hold
The Bank of England today announced it was keeping interest rates on hold at 0.5% and the level of asset purchases at £275 billion, both in line with expectations. The lack of move in both QE and rates is no real surprise, and traders will now focus towards next month’s decision, where we could see an increase in QE levels given the fact that the BoE will have the next quarterly inflation report to digest and justify its next move.

Tesco shares plummet 13% after dreadful Xmas
Shares in Tesco were a key drag on the FTSE 100 on Thursday, falling 13% after the UK supermarket chain warned that profits would be hit by a worse than expected trading performance over the Christmas period.

Tesco reported a drop in sales of 2.3% excluding VAT and fuel, which badly underperformed an expected drop of 0.9% by most investors and warned that trading profit in 2012 to 2013 would be flat, against previous expectations from shareholders and investors for a 10% rise.

This is a terrible update by Tesco, pure and simple. Not only is it heightening fears over the ability of Tesco to maintain profits and market share, but it is equally worrying for retailers in the UK where Tesco has really suffered. £1 in every £10 spent on the high street in the UK goes to Tesco and so the firm is a bellwether stock which many look to for guidance on the current temperature of the UK high street. As a result, Tesco’s update has dragged down the share prices of major retailers with it, seeing both Morrison’s and Sainsbury’s shares fall 5% also.

RBS reform plans give shares a lift
Shares in RBS led the FTSE 100 higher, rallying 8% after the bank announced restructure plans that would see 3,500 job cuts at its investment banking unit and said it would either sell or shut down its equities and advisory business over the next 3 years. Under the plans, RBS aims to cut the balance sheet by £120 billion to £300 billion and restructure its wholesale banking businesses into ‘markets’ and ‘international banking’ divisions, in a move it says shows it is adapting to ‘significant pressures’.

The restructure is a proactive move to reduce costs and bring about more stable returns to shareholders, who have reacted positively, considering the poor performance many large banks have suffered in their investment arms over the past year.

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