GLOBAL MARKETS-Euro worries spark share selloff, Spanish yields jump

by on September 26, 2012 9:50 am BST

Wed Sep 26, 2012 5:50am EDT

* Euro dips to two-week low as austerity protests grow

* European stocks follow U.S. and Asian markets lower

* Spanish, Italian yields jump as pressure mounts on Madrid

By Richard Hubbard

LONDON, Sept 26 (Reuters) – Shares fell around the world on
Wednesday and the European single currency hit a two-week low as
popular opposition within the euro zone to austerity unnerved
investors already worried about a weak global growth outlook.

The main focus was on Spain: protesters clashed with police
on Tuesday as Madrid prepared to unveil its 2013 budget on
Thursday; and the Catalonian government, which oversees the
country’s biggest regional economy, called a snap election which
could jeopardise plans for economic reforms.

A general strike in Greece and signs of dissent among key
euro zone officials over new policies to tackle the region’s
debt crisis were also combining to take the gloss off recent
moves by the European Central bank to calm markets.

“Once again, it shows that when the ball is back in the
governments’ court, I think there’s all this room for
disappointment,” said Tobias Blattner, European economist for
Daiwa Capital Markets.

“I think we just see that the governments are not living up
to expectations, are not implementing what they promised.”

The renewed concerns over the euro zone’s ability to tackle
its financial crisis have sparked a sharp rise in volatility on
equity markets, leading to the worst day since June for the S&P
500 index on Tuesday and subsequent falls across Asia.

As a result the MSCI world equity index was
down 0.7 percent at 332.70 points and had retraced all the gains
made after the U.S. Federal Reserve announced a new round of
aggressive monetary easing last week.

Adding to the negative sentiment, Philadelphia Fed President
Charles Plosser said on Tuesday that the Fed’s latest stimulus
measures will not do much to boost economic growth or lower
unemployment and raises the risk of longer-run inflation.

In Europe, the main blue chip STOXX 50 index was
down 1.78 percent, its biggest one-day fall since early August,
led by declines in Spanish and Italian markets which were more
than two percent lower.

The FTSEurofirst 300 had shed 1.1 percent to
1,107.42 points, having risen 0.4 percent on Tuesday. It is
still up over eight percent for the September quarter.


The growing problems facing Spain, exacerbated by
uncertainty over when the government might request an
international bailout, pushed the euro down 0.4 percent to
$1.2848, its lowest level since Sept. 12.

“The Spanish story does seem to be deteriorating. We are
seeing Spanish bond yields pushing higher this morning and
that’s being echoed by a slightly lower euro,” said Daragh
Maher, currency strategist at HSBC.

Spain’s benchmark 10-year bond yields rose 23 basis points
to 6.00 percent, while the cost of insuring the
debt against a default has also risen sharply.

Spain faces a big week with not only next year’s national
budget set to be unveiled; also due for release are plans for
new structural reforms for the economy and the results of stress
tests on the Spanish banking sector.

Madrid faces a difficult task in reducing its budget gap in
an economy which the central bank said on Wednesday is still
contracting at a “significant rate”. [ID:nE8E8GI01Q}

Economically important Catalonia’s decision to hold early
elections only added the pressure on Spanish Prime Minister
Mariano Rajoy, who conceded in an interview with the Wall Street
Journal that he would ask for a bailout if the country’s
borrowing costs remain too high for too long.

“Ahead of these elections, we will have that classical
political paralysis. So I think the government in Catalonia will
probably not try its hardest to meet the targets,” said Daiwa’s
Blattner said of goals set for reducing public deficits.

“All the targets for the year as a whole for Spain I think
are now under threat.”

Meanwhile Italian Prime Minister Mario Monti’s statement on
Tuesday confirming he would not run in an election due next year
added to the weakness spilling over from Spain into its bond
markets. Italian 10-year bond yields were up 9 basis points to
5.2 percent.

Commodities markets remain focused on the health of the
global economy and signs that slowing growth may be putting a
brake on demand.

Brent crude oil futures were down 67 cents to
$109.75 a barrel, their second drop in three days, and U.S.
crude declined 72 cents to $90.65 per barrel.

Three-month copper on the London Metal Exchange was
down 0.8 percent at $8,210.50 per tonne, although this followed
a gain of more than 1 percent on Tuesday.

“With worries about Europe and Spain in focus this week, and
lingering anxiety over China’s economic growth, we see the risk
of gains in Q3 turning out to be a false dawn,” said ANZ Bank’s
metals analyst Nicholas Trevethan.