Spanish bond yields spike as mood sours

Friday 18.00 BST: Global equities are in retreat once again while the yield on ten-year Spanish bonds is back above the closely watched 6 per cent mark, after Chinese GDP growth fell to its lowest in ten quarters.

The S&P 500 is losing 0.8 per cent, giving back half the gains from its two day bounce on Wednesday and Thursday, and heading back towards its lowest levels in a month.

The FTSE Eurofirst closed with a loss of 1.6 per cent, just 3 points clear of its lowest level since January hit earlier in the week. The benchmark European index is now down 8 per cent from year-highs hit at the end of the first quarter, after its fourth straight week of losses.

A five-day selling streak for global stocks had been halted on Wednesday and Thursday by indications that central banks in Europe and the US remain ready to intervene with asset purchases if market conditions continue to deteriorate.

But Friday’s data from Beijing has rocked confidence in another leg supporting the global market – hopes for a “soft landing” for the world’s second-largest economy.

China said early on Friday that its economic output increased 8.1 per cent in the first quarter, the smallest gain since mid-2009 and less than the 8.4 per cent predicted in a Bloomberg survey. In the US, meanwhile, consumer prices rose 0.3 per cent in March, in line with estimates, but a survey showed consumer confidence dropped in April.

Madrid bore the brunt of selling, with the yield on Spain’s ten-year bonds climbing 25 basis points to breach the 6 per cent mark at which the government's cost of borrowing is widely considered unsustainable, just after 5pm in London, according to Reuters data. It was the second time Spain’s bond yield had breached the 6 per cent mark since the European Central Bank launched its long-term refinancing operation last year.

Investors also dumped Spanish equities, with the IBEX 35 tumbling close to 3 per cent, leaving it down ten per cent so far this month.

Jim Reid, a strategist at Deutsche Bank, wrote in a note: “The situation in Spain remains highly changeable and unstable. We have [government bond] supply next week, which could be a key focus.”

The cost of insuring against a Spanish default also climbed to near a record high. In contrast, haven government bond yields in Holland, Germany and the UK all edged down, while the yield on ten-year US Treasuries slipped back below 2 per cent, in an indication of strongly cautious sentiment.

With US economic data taking a softer turn after last week’s disappointing jobs report, and renewed signs of stress in the eurozone periphery, the market is looking to China to drive growth once again. Some analysts argue that could still be the case, if Beijing takes the weaker than expected growth data as a sign to shift to a more accommodative policy.

“With one eye on the upcoming leadership transition, policy makers could soon replace easing at the margin with outright stimulus. This would benefit global growth plays like commodities, the emerging markets and the Aussie dollar,” Trevor Greetham, director of asset allocation at Fidelity, said in a note.

“To stick with a hard-landing view you have to argue either that the authorities are powerless to stimulate the economy or that global growth is collapsing. Neither seems a sensible base case,” he added.

Commodity and currency markets, however, are, for now at least, in thrall to the news of weak Chinese growth, rather than the rumour of further stimulus.

The S&P GSCI index of 24 raw materials is dipping 0.8 per cent, led by copper prices. Spot US crude oil prices fell 0.6 per cent to $103.06 a barrel, while gold is falling 0.5 per cent to $1666 a troy ounce.

The euro is falling 0.8 per cent against the dollar to 1.308. Australia’s dollar, which tends to rise and fall with expectations about Chinese demand for the country’s raw materials, is off 0.6 per cent to 1.0372. The dollar index is climbing 0.7 per cent, but despite the greenback’s strength, the yen, seen by many investors as the ultimate haven currency, is climbing 0.2 per cent against the US currency.

First-quarter earnings season in the US is gathering momentum, but better than expected first-quarter earnings for Google and JPMorgan failed to counter poor investor sentiment on Friday.

Google late on Thursday reported earnings per share of $10.08, up from $8.08 the year before and ahead of the $9.64 analysts had expected. JPMorgan’s first quarter net profit fell 4 per cent from the same period last year to $5.4bn, but earnings per share of $1.31 were ahead of expectations. Net revenues also rose, the bank said.

That did appear to lift Asian stocks, which had earlier enjoyed a better end to the week than their European and US counterparts, despite the Chinese growth data.

South Korea’s market did particularly well, after North Korea’s feared rocket launch ended in a damp squib, with the missile breaking up and falling into the sea shortly after launch. The Kospi index gained 1.1 per cent.

Meanwhile, Japan’s Nikkei gained 1.2 per cent, the Australian market rose 1 per cent and Shanghai’s benchmark gauge added 0.4 per cent. Hong Kong’s Hang Seng was the best performer, climbing 1.8 per cent.

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