A slow sell off on disappointing Federal Reserve news and Chinese data

European markets traded lower as investors displayed a disappointed reaction to the Federal Reserve’s lack of mention of further quantative easing and its more bearish stance on the forecast for the US economy. This, in addition to more weak economic data from China, has seen investors reassess their positions after a four-day rally. The FTSE 100 lost 1% as a result with the German DAX losing 0.77% as resources stocks fall out of favour.

Last night Ben Bernanke said that the US Federal Reserve would continue with its Operation Twist programme, a bond buying programme aimed at reducing long term borrowing costs and stimulating growth. However the markets had already priced in the extension of this programme and were really looking out for signs of the more aggressive quantative easing. The rally that we have seen over the past few days has been based very much on the expectation of further QE and although Bernanke said that that the Fed was prepared to do more to help the fragile economy should the labour market continue to suffer, he did not outline a definite timeline.

Other disappointing news for the markets to digest came from China, which reported a contraction in manufacturing PMI to a seven-month low of 48.1 in June. The factory sector in China has now shrunk for eight months in a row, with the euro area slump causing a particular issue for China, which is used to relying on exports to grow its economy. This data, coupled with the Federal Reserve slashing growth forecasts from the US economy this year to a range of 1.9%-2.4% from 2.4% – 2.9%, saw commodity prices drop overnight and resource stocks falter as concerns over demand grow.

Focusing on UK equities the mining and energy sectors have suffered in early trading, with Vedanta, Kazakhmys and BP all shedding over 4.5% of their value. On the plus side, defensive stocks such as pharmaceuticals GlaxoSmithKline and AstraZeneca pushed higher by around 0.5% respectively.

A successful Spanish bond auction this morning saw €2.2 billion of debt sold, this was above the planned range. However the cost of borrowing rose on many of the maturities although notably dropped 11 basis points to 6.6% on the benchmark 10-year government bond. In the short term this will be considered a successful auction and should reduce some of the pressure on Spain as we go into the weekend.

Spanish Bank Stress Tests

After the European close the results of two independent stress tests on Spanish banks were released. The Oliver Wyman Bank audit showed a need for an additional €62bn in funding to strengthen banks balance sheets under stressed conditions, whilst another audit conducted by Roland Berger Bank called for €51.8bn. The results fall some way short of the €100bn requested by Spain as bailout funds and the Bank of Spain said the tests were much tougher than those of which carried out by the IMF recently.