Markets recoup ground but European fears intractable

AP and AFP

LONDON/HONG KONG — Financial markets recovered their poise Wednesday but a run of disappointing economic data in Europe and worse-than-expected earnings from Apple kept the recovery in check.

Markets have been recently rattled by fears that Spain, the euro area’s fourth-largest economy, will need a bailout along the lines of Greece, Ireland and Portugal.

Following three days of losses, Wednesday saw some purchases of beaten-up stocks, notably in Spain, where the main IBEX 35 index was trading 1.6 percent higher. The pressure on the country’s borrowing rates also eased, certainly in comparison to the hefty increases of the past few days. Nevertheless, the 10-year yield stands above 7.5 percent, way above the 7 percent rate considered to be unsustainable in the long-run.

Elsewhere in Europe, Germany’s DAX rose 0.3 percent to 6,411 while the CAC-40 in France was 0.5 percent higher at 3,090. Britain’s FTSE 100 index of leading British shares was 0.2 percent higher at 5,508 even though official figures showed the country’s economy shrinking by a greater than anticipated quarterly rate of 0.7 percent in the second quarter of the year.

The euro was also faring bit better than in recent days, trading 0.5 percent higher at US$1.2132. On Tuesday, it fell to a two-year low of US$1.2052.

Wall Street is also poised to make modest gains, with both Dow futures and the S&P 500 futures up 0.2 percent.

However, the main focus remains on Europe’s debt crisis and in particular Spain and Greece.

“Sentiment in Europe continues to deteriorate at a rate of knots,” said Michael Hewson, markets analyst at CMC Markets.

The cost of bailing out Spain would potentially be twice the size of aid for Greece, Portugal and Ireland combined. This factor has raised questions over how long Europe’s stronger economies will continue rescuing the weaker ones.

Wednesday’s release of the closely watched Ifo survey of German business sentiment added to concerns over the state of the German economy. This follows Moody’s announcement earlier this week that the country’s credit rating was under pressure by the crisis enveloping Europe.

So that Germany can be insulated from the crisis, there have been growing calls in Berlin to allow Greece to leave the euro. Investors think that could happen soon if Greece’s international debt inspectors conclude that little progress has been made in reforming the country’s economy.

“It does appear though that we approaching the endgame for Greece and that European officials will soon have no alternative but to make some very tough decisions regarding whether or not they provide more money and time or whether they restructure now and also whether Greece should stay in the eurozone,” said Gary Jenkins, managing director of Swordfish Research.

Another worry in the markets heading into August, when liquidity levels are low, is that price movements could be exaggerated, in much the same way as they were last year. That could make matters worse in Europe crisis resolution effort.

“If liquidity dries up moving into August, prices are open to being driven by much less than in normal conditions, compounding fears of volatility,” said David White, a trader at Spreadex.