European stocks bounced back yesterday following heavy losses on Tuesday that were sparked by renewed fears over Spanish debt and weak global economic growth.
Investors continued to track Spain and eurozone peer Italy as their borrowing costs approached uncomfortably high levels, but took heart that the European Central Bank appeared set to take action if needed.
London’s benchmark FTSE 100 index added 0.70 per cent to close at 5,634.74 points, while Frankfurt’s DAX 30 rose by 1.03 per cent to 6,674.73 points and the Paris CAC 40 won 0.62 per cent to 3,237.69 points.
Milan’s FTSE Mib index – which had slumped nearly 5.0 per cent on Tuesday – rallied 1.60 per cent to 14,690 points and Madrid’s Ibex 35 was 1.93 per cent higher at 7,576.7 points.
Barclays Bourse broker Renaud Murail pointed to remarks by ECB board member Benoit Coeure, who suggested that markets were overestimating the extent of Spain’s problems and did not rule out additional purchases of sovereign debt by the central bank.
“The slightest argument serves as a pretext to provide a bit of support and in that sense, the European Central Bank’s comments were well received,” Mr Murail said.
In foreign exchange trade, the European single currency edged higher to $1.3105 from $1.3080 late in New York on Tuesday.
US stocks also bounced back from steep losses on Tuesday, with investors looking for underpriced stocks in the wake of aluminium giant Alcoa’s surprise quarterly profit.
The Dow Jones Industrial Average was up 0.98 per cent to 12,840.77 after an hour of trade.
The broader S&P 500 gained 1.15 per cent to 1,374.18, while the tech-heavy Nasdaq climbed 1.28 per cent to 3,029.51.
“Bargain hunters are circling the Street, after five days of selling in US equities,” noted Karee Venema at Schaeffer’s Investment Research.
In London, “the focus falls on the Spanish situation and whether it will be the next eurozone country to be bailed out,” said trader Andrew Crook at Sucden Financial Private Clients.
Madrid’s 10-year bond yields eased to 5.87 per cent after spiking to the psychologically significant 6.0-per cent level.
Spain is flirting with rates which many consider unsustainable as the country struggles to stabilise its public finances and get its economy back on track.
Italian 10-year bond yields – the return earned by investors – eased to about 5.51 per cent.
Rome, nonetheless, had to pay much higher rates yesterday when it raised €11 billion in shorter term debt.
Investors are worried because long-term bond yields in Italy and Spain are approaching levels that sparked huge EU-IMF rescues for Greece, Ireland and Portugal.
“The sovereign debt crisis still looks precarious and we would not be surprised if today’s moves provided only brief respite,” commented Kathleen Brooks at Forex.com. Investors have become worried that the severity of Madrid’s austerity measures could deepen the country’s economic downturn, hitting its ability to repay debts.
“The Spanish government appears to be losing its battle to restore credibility on the budget front,” Rabobank analyst Jane Foley noted.
Ms Brooks added that “it’s hard to see things calming down in the near to medium term unless EU authorities intervene in the coming days and weeks.”