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UK stock market commentary (October 03, 2012): Will Spain's refusal put France in spotlight

European woes persist and the Spanish Prime Minister’s insistence that a bailout will not be sought has thrown another spanner in the works.  Investors had been gearing up for a bailout and many officials in the country have mentioned the preparations that have been going 0n behind the scenes.  Of course the major signal was last week’s budget which saw greater than expected austerity proposed and most saw this as the biggest indication that a bailout request was imminent.  It looks as though for now that the German paymaster, who is heavily opposed to a Spanish bailout of course, has been able to assert its pressure and prevent it from happening.

The problem with this of course is that the markets don’t like it and it has sent Spanish borrowing costs higher this morning.  The longer a Spain is left to its own devices the more the uncertainty will build and we will see markets just oscillate backwards and forwards as investors think, yes they will, no they won’t.  Even this morning’s Spanish services PMI data makes for grim reading coming in way below expectations.

But it isn’t just Spain that we have to worry about as they continue to drag their feet.  Italy is another big ticking time bomb, but these are the least of the eurozone’s concerns when you consider that the big beast of France could well be targeted in the not too distant future.  The budgetary and fiscal measures announced by the new President Hollande go little way to inspire confidence when the country has one of the most bloated public sectors in Europe.  If he does not address his government’s spending soon then France might be the next target of nervous investors as a 75% wealth tax on millionaires might win a few votes, but it won’t bring your deficit down or protect you from attack by the bond markets.  Anyway, haven’t we seen this all before where countries have continually denied the need for financial assistance until they eventually succumb?  We will see in the case of Spain.

US indices also suffered from the disappointment of Spain’s claims of not needing a bailout and Australia’s cut in its benchmark interest rate by 25 basis points yesterday, fearing deterioration in the global outlook in general and further slowdown in the Chinese economy in particular, stirred the bears during the US session sending the Dow 30 points lower.  This in turn has led to the negative start to today’s trading session in Europe.  The FTSE at the time of writing is 5790 in the red by some 15 points.

Initially the euro enjoyed a rally versus the US dollar which was interrupted by the surprise announcement that Spain is not too keen to ask ECB for a bailout.  It could be that when it comes to domestic politics Prime Minister Mariano Rajoy has plenty on his head in dealing with street protesters.  So delivering a message acceptable by Spanish people, markets and the ECB is a difficult affair.  However, the euro managed to close 29 pips up at 1.2915, but this morning the risk aversion is just pushing EUR/USD lower to 1.2895 at the time of writing.

Gold has little changed over the past three days moving within a two buck range since Friday and closing at 1774.5 yesterday.  The precious metal's allure seems to be declining among uncertainty about Spain's bailout and in anticipation of a fresh catalyst.  Spain is at the centre of the eurozone debt crisis and investors are waiting for something to happen, a bailout perhaps and rumours are rife or on a global level more monetary easing measures that can kick start the market once more after it reached highs of $1783.3 earlier this year.  1800 bucks is a target level for many investors hoping the yellow stuff will become more attractive in the face of fiscal uncertainty and a massive open-ended monetary expansion.

A timid advance during the first part of the trading session in crude was overturned late in the afternoon by profit taking on concerns over the global outlook.  Spain seems to be delaying its bailout call, Australia worries demand for its commodities could go down so it is difficult for oil investors to remain bullish for too long.  As a result the WTI crude prices dropped 52 cents to $91.89 with participants now awaiting extra clues from the release of the US weekly inventories report.