GLOBAL MARKETS-Spain downgrade jars, Italy auction calms

April 27, 2012|Reuters

* Spain, Italy yields nudge higher after Spanish downgrade

* Italy calms nerves by selling almost 6 bln euros of bonds

* Broader world markets in equities and FX stable, euro up

By Michael Dolan

LONDON, April 27 (Reuters) - Spanish and Italian borrowing
rates nudged higher on Friday after a two-notch downgrade of
Spain's sovereign credit rating, but world equity and currency
markets shrugged off the move and Italy managed to sell almost 6
billion euros of new bonds.

Spain's 10-year borrowing rate briefly topped 6 percent
again in early trade after Standard & Poor's ratings firm late
on Thursday cut the country's credit rating to BBB plus on
concern about the government's exposure to its ailing banks.

But yields slipped backed later to trade just 6 basis points
higher on the day at 5.95 percent. Italian yields were also
slightly higher, but nerves were eased as it sold 5.95 billion
euros ($7.87 billion) of new bonds without incident even though
at higher rates.

Italy's debt sale "looks better than the market expected
because there were quite a few negative comments coming after
the Spanish downgrade", said Achilleas Georgolopouos, strategist
at Lloyds Bank in London.

"The 5.9 (billion euros) number is pleasing. Any number
below five would have created a bit of a problem for them."

Michael Leister, DZ Bank strategist in Frankfurt, said the
Italian bond auction meant that there was "at least no further
bad news, nothing to provide further fuel to the sell-off we
have had in periphery paper this morning".

The limited fallout from the Spanish downgrade elsewhere on
world markets shows how much the now chronic euro government
debt problems are largely in world prices.

European benchmark equity indices were higher on
the day, with euro bank stocks and even Spain's main
bourse up on the session too. World equities
and emerging markets were also stable
to higher and Wall St futures indicated U.S. stocks were
set for a steady open.

Even the euro currency bounced back quickly to trade
higher against the dollar on the day.

"I'm a bit surprised at the euro's resilience but part of
the explanation is that the currency channel isn't the cleanest
way to express discomfort with the periphery," said Daragh
Maher, currency strategist at HSBC.

"If you don't like Spain you sell their bonds and buy German
Bunds so the currency impact is muted," he added.


What's more, traders were keenly awaiting first quarter U.S.
economic growth data - which is due out later on Friday and
expected to show a slight slowdown to 2.5 percent growth from
3.0 percent - and have one eye on next week's European Central
Bank meeting for signs of possible further monetary easing.

The Bank of Japan was the latest major central bank to
resume bond buying and money printing earlier on Friday,
although its announcement that it would buy an additional 10
trillion yen through June next year had only limited impact on
local markets there.

The yen rebounded after initial losses and the Nikkei
ended down after early gains. Some analysts were wary of
the commitment and motivation of the Bank of Japan.

"They seem motivated by politics and political pressure in
minimum that they feel they are forced to do," said ING's chief
Asia economist Tim Condon.

The Spanish downgrade kept oil prices subdued below
$120 a barrel.

Overall, strategists say world markets have settled into an
uneasy calm after retreating from the ECB-fuelled rallies of the
first quarter.

Much of Europe's debt problems are now well known if still
laden with risks and there is the chance of further policy
support from the ECB and others if the situation deteriorates.

The U.S. economy appears to be slowing again, but still
appears to be growing at a steady if unspectacular clip.

And fears of a hard landing for the slowing Chinese economy
also appear to have been eased for now at least.

Barclays analyst Jose Wynne said the global markets may stay
in the doldrums for a bit longer but Barclays still believe
there are further gains for risky assets later in the year.

"Global risk sentiment is in a weird spot these days. Risk
is trading sideways in a relatively narrow range, with a lot of
intraday volatility. Nervousness is apparent, but vol (implied
volatility) remains relatively low," Wynne said. "Trends are
missing. Market participants lack conviction, and volumes are
low. This may last for a while, but not too long."