Spain, Italy concerns drag Europe down

European shares turned negative as fresh worries over debt problems at Spain and Italy wiped out initial relief from a victory for pro-bailout parties in Greece that had sparked an earlier rally on the equities markets.

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European shares turned negative on Monday as fresh worries over debt problems at Spain and Italy wiped out initial relief from a victory for pro-bailout parties in Greece that had sparked an earlier rally on the equities markets.

The FTSEurofirst 300 index surrendered its earlier gains and was down 0.1 percent at 992.72 points by 10:55 SA time, while the Euro STOXX 50 index fell 0.3 percent.

Spanish and Italian government bond yields rose, dogged by concerns about Spain's fiscal and banking problems, and Spain's IBEX and Italy's FTSEMIB equities indexes fell by 1.7 and 1.5 percent respectively, underperforming other European markets.

“The initial reaction was too euphoric. Fundamentally, the problems haven't changed,” said Bastion Capital's head of equities Adrian Slack.

Spanish 10-year government bond yields rose 22 basis points on the day to 7.14 percent, pushing the nation's implied borrowing costs to their highest during the euro's lifetime. Greece, Ireland and Portugal were forced to seek international bailouts soon after their 10-year bond yields surpassed 7 percent.

Italian 10-year bond yields also rose 15 basis points to 6.08 percent. The 10-year Spanish yield premium over Italy rose to 108 basis points, also a euro-era high, according to Reuters charts.

BANK STOCKS FALL BACK DOWN TO EARTH

The STOXX European banking index, which had initially risen by more than 2 percent, fell back and was down by 1.2 percent.

Concerns over the European banking system were highlighted by data from the Bank of Spain on Monday, which showed that Spanish banks' bad loans rose to 8.72 percent of their outstanding portfolios in April, the highest level since April 1994.

Argonaut Capital Partners' Barry Norris said it remained too risky to buy into southern European equities and European bank stocks for now.

“After the initial relief, markets are likely to realise this Greek election result is unlikely to be a significant turning point. Southern Europe and Eurozone banks remain too risky,” said Norris, whose firm manages around 1 billion euros ($1.26 billion) worth of assets.

Analysts also cautioned that the political climate in Greece remained uncertain given that pro-bailout parties committed to keeping Greece within the euro zone won only a slim parliamentary majority on Sunday.

Greece's radical left SYRIZA bloc vowed to continue its opposition to the painful austerity measures demanded of the country.

“I'm not convinced that much has changed in Greece. Chasing the markets higher at the moment would not be the best way to play it,” said Central Markets chief strategist Richard Perry. - Reuters

Source: http://www.iol.co.za/spain-italy-concerns-drag-europe-down-1.1321449

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