21:05 BST: Stabilisation continues as the theme of the week, with equities shrugging off eurozone debt worries for now thanks to some strong corporate earnings and a tough Spanish austerity package.
Wall Street moved higher in afternoon trading, with the S&P 500 index rising 1.4 per cent to 1,171.67 while the Dow Jones Industrial Average is up 1.4 per cent at 10,896.91, both ending near session highs.
However, optimism was restrained, as evidenced by the S&P’s failed attempt – for the second session in a row – to cross its 50-day moving average at 1172. While Wall Street might no longer feel the world is ending, it is not yet ready to resume the climb toward 1,300 for the S&P, which strategists earlier this year predicted it would reach.
This follows a session of decent gains in Europe, where first-quarter eurozone GDP data helped sentiment, as have better than expected results from ING, the Dutch financial services group and AP Moeller-Maersk, the Danish shipping group.
The FTSE Eurofirst 300 rose 1.4 per cent at 1,049, while in the UK the FTSE 100 closed 0.9 per cent higher at 5,383.45.
Giles Watts, head of equities at City Index said: “Investors are keenly watching for European economies to spell out how they are going to fix their leaking roofs to maintain recovery efforts and with Spain announcing aggressive cuts today and data pointing to stronger GDP growth in both Germany and Italy, investor confidence has received a bit of a boost.”
News of the formation of a coalition government between the Conservatives and the Liberal Democrats in the UK was also received positively, both because it commanded a parliamentary majority and because analysts felt it would be prepared to act decisively to cut the country’s budget deficit. The yield on the 10-year UK gilt fell 6 basis points to 3.83 per cent.
Shares in the FTSE 250 index of UK mid-cap stocks saw particularly strong gains, and the index climbed back through the 10,000 mark to 10,186, up 2.1 per cent on the day. Consumer goods companies and housebuilders were the stand-out performers.
But sterling was caught between two forces – a dovish inflation report from a downbeat Bank of England on the one hand and relief that the coalition had been finalised on the other. Hence the pound was unable to hold above the $1.50 level against the dollar struck earlier in the session, and it turned 0.9 per cent lower on the day to $1.4827.
Those who believe the positive market mood is only temporary will find succour in the continuing flight to bullion. Gold, which overtook its December high of $1,226.10 an ounce on Tuesday, gained further ground, reaching a fresh peak of $1,244.95. Gold bugs have been snapping up coins, particularly in Germany and Switzerland, amid fears over the potential inflationary impact of the European Central Bank’s decision to buy eurozone government bonds to tackle the region’s debt crisis.
This gets to the heart of investors’ current concerns. Perhaps the key tension in markets is between an improving US economic picture and rising corporate profits on the one hand, and fears that the €750bn eurozone bail-out package will not solve the region’s deep-seated problems. For all that the package tackles the liquidity problems of the eurozone periphery countries, it does not immediately solve their solvency woes nor guarantee that they will be able to enforce austerity packages to rein in rising debt.
This has kept the euro under pressure, in spite of a rally on Monday when the bail-out package was unveiled. The single currency was 0.3 per cent lower on the day at $1.2627 against the dollar, just over a cent above Thursday’s low of $1.2520 but well off Monday’s high of $1.31.
Credit and bank risk remained elevated, with the Libor-OIS spread widening 1bp to 43bp, still its highest level in a year. The FTSE Global Bank index also spent much of the session in the red, gaining only 0.1 per cent by later in the US trading day. On the other hand, bank credit spreads tightened fairly sharply in Europe and the US.
Michael Harnett, chief global equity strategist at Merrill Lynch, said the eurozone bailout package “reaffirmed the global regime of low interest rates and liquidity abundance. But events in Europe also signal the onset of a fiscal retrenchment across the developed world in the form of lower spending, higher taxation and deeper regulation.”
Yields on Greek and Portuguese debt continued their declines. Danske Bank notes that the ECB has so far mainly been buying short-dated Greek, Portuguese and Irish bonds – the weakest and smallest markets. “This has resulted in a large narrowing of spreads between Italy and Spain on the one hand and Greece, Portugal and Ireland on the other,” it says.
Portugal successfully sold €1bn of 10-year bonds, with a bid to cover ratio of 1.8 times and a new issue premium of 18 basis points. This is the difference between today’s yield of 4.52 per cent, compared with a yield of 4.34 per cent when 10 year bonds were last sold in April.
The latest economic data showed eurozone GDP growth up 0.2 per cent in the first three months, with higher than expected growth in Germany and Italy.
The formation of the UK’s new coalition government has been broadly welcomed by analysts, who believe it is more likely to take the tough measures needed to reduce the UK’s £163bn budget deficit.
“From a market perspective, a clearly far more favourable outcome than a potentially highly fractious power-sharing arrangement between Labour and the Lib Dems in concert with several fringe parties,” said Richard McGuire at Royal Bank of Canada.
In Asian equity markets, the Nikkei fell 17 points to 10,394.03, although it was nearly 1 per cent higher at one stage. The Shanghai Composite, which entered bear market territory on Tuesday after falling 20 per cent from its recent high, dropped a further 1.5 per cent in early trading, but added 8.14, or 0.3 per cent, to 2,655.71 at the close.
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