Euro falls to near two year lows as stocks end week on a choppy note

Early tentative gains for European stocks quickly subsided in weaker afternoon trading in lower volumes, forcing the FTSE 100 into negative territory by around 0.2%, with an hour to go until the close.

Trading has been very choppy today which is typified by lower volumes and short term trading habits that traders continue to exert in the face of the euro crisis and Spanish banking uncertainty. The positive start to trading was short-lived and this perhaps was fairly easy to recognise considering the morning Index gains were led by buys into pharmaceutical stocks and insurance firms, with investors showing little motivation to buy aggressively into financial or mining stocks – two sectors that are firmly weighted in high risk appetite.

The suspension of Bankia’s shares this morning following an expected request for full state rescue to the tune of €15bn was perhaps not a huge surprise but what it does is keep the euro crisis and Spanish banking crisis firmly at the forefront of investor minds in Europe, who are therefore refraining from carrying much risk over into the weekend. Spanish benchmark 10-year bond yields rose on the back of the Spanish banking concern to trade back above 6.33% today, which create a bearish knock on effect to broader European stocks.

The calls from the Catalan President Artur Mas however to the Spanish government to help support it financially and other regions in Spain has also further hit sentiment. Catalonia is Spain’s wealthiest autonomous region and so the fact that it has proclaimed to be running out of options to meet its debt liabilities, maintains huge pressure on the Spanish government to help support its struggling economic elements whilst at the same time attempting to reign in its deficit.

Spain is right now in a perfect fiscal storm. The country is attempting to reduce its debt to GDP ratio to levels approved by the eurozone through austerity whilst at the same time faces huge unemployment levels – 1 in 4 adults are unemployed currently – and its banks are in the middle of a liquidity crisis thanks to toxic mortgage debt. At the same time, its bond yields are reaching unsustainable territory, which reduces its ability to issue new debt to help bailout out its struggling lenders such as Bankia, forcing the country to pressure the ECB into increasing liquidity pools further, an action the ECB has strongly attempted to side step given its previous support to sovereign bond markets.

The euro has also hit a fresh near two-year lows today to trade below $1.25 for the first time since June 2010, echoing similar fragile sentiment in European stock markets. A statement from the Deputy Prime Minister of Belgium that Central Banks and companies would be making a grave error if they were not preparing for Greece to leave the euro, whilst not necessarily incorrect to make such a statement, further qualified that this remains a credible prospect.

The momentum behind the euro’s weakness certainly has the ability to drag the single currency back to the $1.19 level in the near term at its current trajectory, where a break below $1.19 would mark a significant turning point in the euro’s life thus far.

The FTSE 100 has found a platform of support at around the 5250 level, but its continued failure to build upon short term spikes to the upside echoes a broader theme of fragile sentiment and short term trading, with investors happy to lock in their gains quickly. We need to see the FTSE 100 back above the 5400 level for some confidence to re-emerge into the markets, but a break below 5250 puts the 5000 back into play.

Surprisingly strong data out of the US in the form of Michigan consumer sentiment was not enough to encourage some buying into late afternoon. The US sentiment measure rose to 79.3, whilst the forward looking part of the reading – Expectations – rose to its highest point since July 2007. The strength of this data was a real surprise and shows that perhaps US consumers are more optimistic than investors are currently expecting them to be.