Global markets rallied this morning, but the euphoria was short lived as concerns resurfaced about Spain, the eurozone and the state of the global economy. Investors and traders became less optimistic throughout the day as people began to discuss the potential problems associated with Spain’s EUR 100 billion bank bailout.
Spain is the fourth euro member to seek a bailout since the debt crisis began roughly three years ago. The bailout was granted to help the indebted country deal with its worsening banking crisis.
“[The bailout] announcement was a sensible move which provides capital support to bank balance sheets and may help stem any further capital flight from Spain in [the] coming weeks, particularly post-Greek elections,” said Dominic Rossi, global chief investment officer at Fidelity Worldwide Investment. “The size of the bailout was much bigger than expected by the markets and that is certainly a positive in that it will enable Spanish banks to absorb greater losses from their domestic real estate and mortgage portfolios which will certainly grow over the next one to two years.
"However ... this capital injection has to go through Spain’s national accounts, which means effectively the Spanish government is on the hook for the bailout," said Rossi. "Rather than separating the problems of the banking system from the sovereign, the outcome of this bailout is to tie them closer together. Whilst the equity market rallied in response to this announcement, the government bond market has quickly recognised that the bailout is adding to pressure on sovereign risk and this has been reflected in rising yields on Spanish 10-year debt. So while this was a very sound policy move to address a problem in the Spanish banking system, it hasn’t dealt with the major issues around sovereign risk.”
After rallying by nearly 2% in the morning in response to the weekend bailout announcement, the benchmark FTSE 100 then deflated. By the close of the trading day, the index had edged lower by 3 points, or 0.1%, to close at 5,432. The FTSE 250 index also rallied in the morning, but was 41 points in the red at the end of the day, closing at 10,658.
New York-based Greenlight Capital succinctly (and humorously) outlined in a diagram below how markets react to the various eurozone solutions proposed and enacted by policymakers, central bankers and politicians:
This above diagram from a recent Greenlight quarterly newsletter helps to illustrate the sharp rise and steady fall witnessed in the markets on Monday.
Looking ahead to Tuesday’s trading session, Kathleen Brooks, research director at GAIN Capital says: “Tomorrow could be an interesting day. The markets will be preparing for Wednesday’s debt auction by Rome and also looking for more details of Spain’s bailout in the absence of much economic data. Thus we are back to headline risk and rising volatility levels.”
The best performer on the FTSE 100 on Monday was Lloyds Banking Group (LLOY), which saw shares rally by 1.7%. The worst performer was Eurasian Natural Resources Corporation (ENRC). Shares in the international miner fell by 4%.
