European markets lose ground on Spain worries and Fed disappointment

European stock markets look to be breaking a three-day winning streak this morning as they track losses from Asia and on Wall Street. Disappointing comments by the Federal Reserve Chairman last night meant that investor’s attention swung back to Spain’s recent downgrade, and the prospect of slower economic growth in Germany.

By mid morning the FTSE had shed 1% of its value as investors looked to lose riskier assets from their portfolio. A lack of a clear signal from Federal Reserve Chairman Ben Bernanke on further quantative easing lead to a sell off in oil and metal futures which translated to a broad sell off in the mining sector and energy stocks. Vedanta shed 5% and Rio Tinto over 4.5% whilst BP saw a drop of 1.4% in the value of its shares.

Investors were looking for a much stronger indication from the Federal Reserve that they would take imminent action to protect the US economy from the eurozone crisis, especially considering the non-farm payroll data was the weakest it has been for a year. The disappointing comments overshadowed any initial positive reaction the market had to a surprise cut in Chinese interest rate.

Yesterday afternoon the People’s Bank of China delivered the much awaited rate cut of 0.25 basis points, which was met with an initial rally. However as the news has sunk in investors have become slightly suspicious of the timing of the release of this news. The PBOC does not set dates for its policy announcements, it does them when it considers best. The cut was expected after the weekend when a barrage of important economic data will be released from China. The fact that the cut has come prior might suggest some level of emergency.

This morning with investor’s was attention firmly back on the eurozone and particularly Spain and how it can solve its banking crisis. Spain is expected to request European aid for its banks this weekend and figures between 40 billion to 100 billion Euros are being suggested as the required cash injection. Adding to this, yesterday Spain received a downgrade from rating agency Fitch from A to BBB with a negative outlook. This rating is only one rank higher than “junk” status. The banking sector here in UK has reacted badly to this news with RBS and Barclays both shedding over 2%.

Other negative news continued to pour out of the eurozone adding to concerns, as flagging demand from the eurozone caused a big drop in German exports and imports in April and UK PPI data came in slightly worse than expected. Germany has been a growth driver for the eurozone however recent data released has shown that even the European powerhouse is not immune from the crisis.

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. CFD and Forex Trading are leveraged products and your capital is at risk. They may not be suitable for everyone. Please ensure you fully understand the risks involved by reading our full risk warning.

City Index is a trading name of StoneX Financial Ltd. Head and Registered Office: 1st Floor, Moor House, 120 London Wall, London, EC2Y 5ET. StoneX Financial Ltd is a company registered in England and Wales, number: 05616586. Authorised and regulated by the Financial Conduct Authority. FCA Register Number: 446717.

City Index is a trademark of StoneX Financial Ltd.

The information on this website is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement.