London: Spanish government bond yields rose above 6 % again on Friday as attention turned from Madrid’s new budget to a ending assessment of its troubled banks and to French budget plans.
Markets in riskier assets were otherwise generally buoyed by expectations that the tough Spanish budget is a prelude to an EU aid programme that will allow the European Central Bank to try to reduce its high borrowing costs by buying its bonds.
The euro also firmed.
Rises in Asia and US equity markets overnight followed into Europe. The euro zone blue-chip Euro STOXX 50 index, which has fallen 8.8 % from a 6-month high hit in mid-September, was up 0.2 %, helping bolster a 0.2 % rise in world shares.
“With the Spanish budget paving the way for an official bailout request...concern about the euro zone crisis has eased,” analysts at Credit Agricole said in a note.
“Overall, some resilience is seen for the moment and markets are likely to consolidate with an upward bias at the month and quarter end.”
The sentiment boost from Spain’s announcement filtered across markets. Brent oil prices were up over 1% above $112 and London copper rose 1 % to $8,264 a tonne. Spot gold hovered at a one-week high of $1,782.6 an ounce, leaving it on course for a sixth straight week of gains.
Focus is set to remain on Spain. The results of an independent audit of country’s banks will be published later in the day, while Moody’s Investors Service is expected to finish its rating review on the sovereign, which may lose its investment grade status.
France comes under the microscope later when President Francois Hollande puts his fiscal credibility on the line with the country’s toughest budget in 30 years. His first annual budget, to be presented to the cabinet mid-morning, must make 30 billion euros ($39 billion) in savings to keep deficit-cutting promises.
Despite the upbeat market mood the optimism surrounding Spain’s plans was not universally shared. Like many economists, Derek Halpenny, European head of global markets research at Bank of Tokyo Mitsubishi, warned growth forecasts built into the debt targets were overly optimistic and were unlikely to be met.
“At some point that credibility issue is likely to come back to undermine the current confidence. This is the fifth package - so the history of previous packages is that they weren’t enough and lacked credibility,” Halpenny said.
“The euro may still squeeze higher over the short-term but any rally will be unsustainable.”
The single currency which had fallen more than 2 % in less than two weeks up until Wednesday, was up 0.17 % at $1.2935 on the back of Spanish optimism leaving it up 0.8 % over the last two days.
Euro zone inflation data added to upward pressure as a surprise rise in Eurostat’s flash September reading cast doubts over the near term chances of another interest rate cut from the European Central Bank.
Ahead of its budget plans, France announced its public sector debt rose almost 2 % to 91 % of GDP. Greece’s battered economy showed little sign of recovery as the latest retail data showed sales plunged 9.1 % year-on-year in July.
Elsewhere in the currency market the dollar was on the defensive down 0.14 % against a basket of key currencies .
And in another sign of improving global risk sentiment, the Indian rupee hit a near five-month high after the country’s government opted not to increase borrowing.
“Risk appetite is coming back after the Spain budget,” said Dag Muller, technical analyst at SEB. “It will translate into a fresh high for euro/dollar beyond $1.3173 and then the market will start to wobble”. Reuters