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Investors seek safety as Spain bans short selling

MARKET BLOG: Yields on US, German and UK government bonds drop as equity markets slammed.

Investors seek safety as Spain bans short selling
  • Investors seek safety as Spain bans short selling
  • Yield on 10-year Spanish bonds jumps close to 7.5%, spurring bailout fears
  • Spain's recession worsens and a second region requires state aid
  • Euro fears hit miners and financials, with Barclays and Aviva among the big fallers
  • Barclays' woes compounded by leadership vacuum as two leading candidates for chairman and chief executive withdraw 
  • Domino's Pizza and online gambling operator 32Red boosted by good news; Red Emperor and Range Resources crash as Somalian oil well disappoints

16.10: Perceived safe havens are benefiting from today’s eurozone panic.  

Yields on 10-year US treasuries – which move inversely to the price – are down to a new low, falling to 1.40%. German 10-year bunds have similarly fallen, to 1.17%, and UK benchmark bond yields are down to 1.46%

The dollar, as measured against a basket of currencies, is 0.36% higher at 83.78.

The price of gold, a traditional safe haven, has fallen since February. The price, which moves inversely to a rising dollar, is today down 0.63% at $1,574.

Conversely, measures of volatility and risk in the market have spiked. The Vix index has opened up 17%, while the iTraxx SovX index of Western European CDS Prices is 3.2% higher. Spain's benchmark borrowing costs have remained stubbornly high, now just below 7.5%.

Equity markets remain sharply lower, though Spain's Ibex has pulled back a lot (now down just 0.4%) since a ban on short-selling was announced this afternoon.

Oil price and euro drop

14.28: Every FTSE 100 stock is now in the red, and the US Dow has opened 1.5% lower. But it’s not just shares and government bonds that are tanking today.

The euro is down to lows not seen for two years, dipping below $1.208 against the dollar. The single currency has been selling off since the end of April 2011.

The oil price is also reflecting the market’s macroeconomic fears, with Brent crude futures down 3.7% to 102.84, erasing much of the gains seen in recent weeks.

Evraz the biggest faller

13.45: Markets continue to slide ahead of Wall Street opening for trading. US futures point to the Dow Jones Industrial Average falling 173 points, or 1.3%, to 12,603. The S&P 500 is expected to fall 16 points to 1,340.

The FTSE 100 extends its decline, down 126 points, or 2.2%, on the day at 5,525.

Russian steelmaker Evraz (EVRE.L) is the biggest faller, down 8.7% or 20.6p at 213p as a sell-off in resources stocks is compounded by Morgan Standley questioning its earnings targets.

Aviva (AV.L), the high-yielding insurer shedding businesses attempting to shore up its capital position, has fallen further, trading 18p, or 6%, lower at 276.

Outsourcer Serco (SRP.L) is the one stock in the FTSE 100 to gain ground, rising modestly to 566.5p.

Fear grips the markets as the economic problems of Greece, Spain and Italy appear to converge. In a sign of the panic Italy has reintroduced a termporary ban on the short selling of financial stocks. Spain's market regulator has banned all shorting of stocks for three months.

FTSE falls 1.7% as Spain careers towards bailout

12.00: Spain’s chances of averting a bailout are fading after the country fell deeper into recession in the second quarter.

Bank of Spain figures show the Spanish economy shrank by 0.4% in April- June after a 0.3% contraction in the first quarter.

Spain’s economy minister Luis de Guindos insists: ‘Spain is a solvent country, there will be no bailout... I believe that Spain is a competitive country. We have a trade surplus with the eurozone, we have a very competitive tourism sector’.

But this stance looks increasingly forlorn with Spain’s borrowing costs surging after investors dumped the country’s government bonds in fear at the country’s growing exposure to its troubled regions. Mercia and Valencia have both said they will tap a government fund and there are reports that six more regions could follow suit.

The yields on Spanish 10-year bond jumped to nearly 7.5%, well beyond the 7% level at which other eurozone countries have required bailouts. The Spanish stock market tumbled 3.5% with the broader Euronext 100 index falling nearly 2%.

De Guindos plans to travel to Germany tomorrow to discuss the crisis with his counterpart Wolfgang Schaeuble.

Spain is locked into a downward spiral with the Bank of Spain’s deputy reiterating the need for more austerity that will further restrict economic growth. ‘We need to continue further along the same line. We need more cuts, more reforms which will restore market confidence and mechanisms which will strengthen the monetary union,’ said Fernando Restoy.

The situation is deteriorating as authorities fail to keep pace with events. The €100 billion bailout of Spain's banking sector was confirmed on Friday but with the country's indebted regions locked out of the bond markets there is no end in sight to its debt crisis.

Worryingly, there are reports that 10 cities in Italy may also be struggling financially. In an echo of what is happening in Spain, Reuters cites a report in La Stampa newspaper that says government sources believe the cities, including Naples and Palermo, 'are at risk' of default. Although such a default would not immediately increase the country's €2 trillion debt pile, it shows the growing pressure on government finances as the recession bites. 

Government bonds in the UK and Germany rose amidst this uncertainty. The 10-year yield on German bunds fell to an all-time low of 1.14%, while in the UK 10-year gilts fell to 1.4%.

Doom and gloom is good for Domino's

11.00: There is one company doing well from the rainy weather and economic gloom. Domino's Pizza UK & IRL (DOM.L), Britain's biggest pizza delivery company, saw pre-tax profits rise by 13.2% in the first half of its financial year as people stayed at home and ordered pizza. 

The company opened 23 new shops and closed one during the period giving it a total of 748. Like for like sales in the UK rose 5.7%, up from 3.4% in the year before. 

Chief executive Lance Batchelor said: ‘Trading since the half year end has continued in line with our expectations. While the consumer backdrop remains tough we are confident about the future and our expectations for the year as a whole remain unchanged.’

In a falling market the shares fell 2% to 509p. They have risen 26% so far this year.

Revenues race ahead at 32Red

Shares in 32Red (TTRL.L) jumped 3.3% valuing the online gaming company at £30 million after it said full-year revenues would beat forecasts. The Gibraltar-based company, which is backed by Gervais Williams' Diverse Income Trust , said first half revenues rose 50% to £16.5 million. It plans to follow rivals William Hill and Paddy Power in launching gambling websites in Italy, one of the lagest gambling markets in the world.

Red Emperor crashes

This is not the day for an oil exploration company to announce bad news. Red Emperor Resources (RMPq.L), a hot stock among traders, dives 46% to 11.25p after test drilling at the Shabeel North well in Puntland, Somalia, failed to show any traces of oil. Range Resources (RGRS.L), which also has a stake in the well which is being developed by Horn Petroleum, fell 16% or 1p to 5.5p.

UBS: risk of 'terrifying economic disaster' in Europe grows

10.00: There is of course a Greek dimension to the latest surge in eurozone fears. Markets have also been spooked by comments yesterday by Germany's economy minister Philipp Resler who said the prospect of a Greece exit from the euro had 'lost its terror'.

Roesler, who is also Germany's vice chancellor, told broadcaster ARD that Greece was unlikely to be able to meet its bailout obligations and, if that were the case, would not receive more payments from the 'troika' (International Monetary Fund, European Central Bank and European Commission. 'What is clear: if Greece doesn't fulfil those conditions, then there can be no more payments.'

Paul Donovan, senior economist at UBS, said Resler's comments may have been merely bargaining positions before the troika's monitoring visit to Athens this week. However, he warned that they risked a panicky response from investors and depositors. 'The risk of sleepwalking into a terrifying economic disaster increased a fraction over the weekend,' he said in his daily podcast.

He added:

‘If politicians have lost a sense of terror over the prospect of a greek exit it suggests that politicians have lost any comprehension of economic reality. There is no firewall around Greece or, if there is, it is constructed of high quality, dry kindling wood doused in gasoline. If Greece goes other countries seem certain to leave. You cannot revoke an irrevocable currency union without causing consequences. Those consequences are likely to be triggered by ordinary citizens and bank runs rather than by financial markets or politicians. That is how monetary union dies.’

The FTSE 100 has fallen further and is now 94 points, or 1.7%, lower at 5,557.

Barclays drops 4% as FTSE tumbles on crisis in Spain

08.55: Financial and mining stocks lead the FTSE 100 1.5% lower over the worsening crisis in Spain. The index of leading shares is now 85 ponits lower at 5,565.

Barclays (BARC.L) plunged 4.3% in early trading but has since recovered some ground to trade 6p or 3.8% lower at 153p.

Fears over the bank's exposure to Spain – where regional governments are turning to the state for help – are compounded by the leadership vacuum after Sir Michael Rake, deputy chairman, withdrew from the race to succeed Marcus Agius as chairman. Agius is due to leave once he has found a replacement for Bob Diamond, the chief executive who also resigned this month over the Libor rigging scandal.

Rake would have had to resign his chairmanships of easyJet and BT to take the job at Barclays. A statement from easyJet says: 'Mike Rake has informed the easyJet board that he has formally informed the chairman of Barclays that he does not wish to be a candidate for the chairmanship of Barclays.'

Meanwhile, according to one weekend report, Rich Ricci, head of Barclays' investment bank, has told friends he does not want the chief executive job.

RBS (RBS.L), the 81% state-owned bank, is the biggest faller, sliding 4.7% or 9.3p to 195p.

Aviva (AV.L), the Europe-focused composite insurer, tumbled 4.2% or 1.1p to 28.8p.

Vedanta Resources (VED.L), Antofagasta (ANTO.L), Xstrata (XTA.L) and ENRC (ENRC.L) are the mining stocks most heavily hit by the fears, falling between 3.6% and 3.8%.

Trading screens are red with all FTSE 100 shares are falling.

Hammerson (HMSO.L), the property developer that is shifting from the office to the retail sector, is among a handful of stocks limiting falls to less than 0.5% after publishing half-year results. Oriel Securities rates the stock 'add' saying both its net asset value (NAV) and earnings beat expectations. 

Yields on Spain's 10-year bonds have shot up to over 7.5% as markets doubt the country's ability to support its tottering regions. Spain's Ibex 35 index has now fallen 3% or 187 points to 6,064. The Euronext 100 is 1.5% ower at 610.

FTSE 100 falls as Spain fears grow after Murcia move

08.15: The FTSE 100 falls 50 points, or 0.8%, in early trading on growing fears that Spain will need a full sovereign bailout.

Murcia yesterday became the second Spanish region after Valencia to say it would take government financial support, intensifying pressure on the country’s finances.

Signs that the eurozone crisis is far from over deepened the economic gloom and meant markets began the week in the same way they ended last week – on the run.

The Euronext 100 fell 1% or 6.6 points to 613.7 with Spain’s Ibex 35 index crashing a further 2.7% of 170 points to 6,076.

France and Germany also fell 1% with the Cac 40 down 32 points at 3,162 and the Dax off 66 points at 6,564.

The euro fell 0.19% to $1.21 and has now fallen over 18% against the dollar in the past 14 months.

Gold tumbled 0.6% or $9.60 to a $1,574 bid price as the dollar firmed amid the uncertainty.

Brent crude slid $2.10 to $104.73 a barrel while US crude dropped $1.99 to $89.84 a barrel.

5 comments so far. Why not have your say?

smoking gun

Jul 23, 2012 at 13:04

When are the Euro die-hards going to swallow their pride and realise that serious realistic action is needed to stop the rot. Greece, now Spain with Portugal and Italy not far behind (not forgetting Ireland's troubles) all going down the Swanee.

(And Is France next?)

Where is all this bailout cash coming from when almost every country in Europe (including GB) is up to their eyes and ears in debt. How much money does the ECB and IMF have available to save these economies. The longer the Eurozone die-hards procrastinate, the worse it will become.

Now is surely the time to bite the bullet and take the appropriate action. If that means breaking up the Eurozone, surely that would be no bad thing. Didn't GB have to do something similar under Major to save the pound and our interest rates.

report this


Jul 23, 2012 at 13:22

If Euro needs to devalue, why do they not devalue? Surely only Germany needs to relaunch the DM in Eurozone, the rest are all near bankrupt and can stay in devalued Euro, %8 interest rates and rampant inflation until they get their act together.

report this


Jul 23, 2012 at 18:51

I am beginning to suspect that the politicians are deliberately not solving the problem, in the hope that they will not be there when the sh1t hits the fan, and to totally exhaust voters with all the problems so that when the step is taken, because of all the fatigue (total and utter exhaustion) with crisis meetings, almost week in and week out, the voters will collectively breathe a huge sigh of relief, even if it involves some temporary inconvenience and hopefully give praise for resolving the crisis.

In reality if they had grasped the nettle, by the time that they do, the expense would have been hugely less, but to resolve the problem they have worn down the voters to accepting a bigger loss and more tax, just to be rid of the problem. At hat point, notwithstanding the much higher bill the politicians will claim a huge success, when in reality it was a massive debacle.

report this

William Phillips

Jul 23, 2012 at 19:10

"the Shabeel North well in Puntland, Somalia"

Some names are too appropriate.

report this


Jul 23, 2012 at 19:49

Come on, let's be clear about the reasons for US and UK low treasury yields. The US Fed and the Bank of England are printing money to buy government gilts. This is the reason for the low yield. If there were no QE the UK would be paying near the same amount as Spain is on its debt. The fact that the UK has low yields because it's buying its own debt with newly created money is nothing to boast about. In fact it's so little mentioned by politicians for being the reason for low yields that it's almost a cover up.

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