European markets trade lower on Spanish rating cut Traders eye BoE rate decision

European indices traded lower once again on Thursday, weighed by investors who looked to minimise the amount of risky asset classes that they held after Moody’s cut their credit rating for Spain by one notch to Aa2. Continued uncertainty over the high price of crude oil and traders awaiting the interest rate decision by the Bank of England also played a role in the subdued demand for stocks this morning.

Spain’s credit rating downgrade by Moody’s whilst perhaps being of too much of a surprise to the markets is an unwanted reminder over the fragility of sovereign debt, particularly in the context of Portugal having to pay such a high premium to bonds sold in yesterday’s auction. There remains a significant concern over Spanish debt and today’s rating cuts by Moody’s simply emphasised these concerns. Put this in the context of the high crude oil prices and hawkish monetary policy stance of the ECB and one can understand why traders may not have a high appetite for risk today.

Traders are also waiting for the Bank of England rate announcement that is due out at noon today. Whilst no change is expected one cannot discount the central bank making a surprise move, as it has done in the past. The focus for traders will however be on the minutes which are release on March 23 and to see if the split in the camp intensifies between those calling for a rate increase (Sentance, Weale and Dale), those calling for further stimulus (Posen) and the other five members calling for no change.

It is unlikely that this split within the committee is likely to be resolved today however, and most market participants are expecting no change to interest rates this month. The momentum within the committee certainly seems to be on ‘the hawkish team’, but with the Bank of England Governor Mervyn King stating only a few weeks ago that there was little sign yet that inflationary pressures are starting to become entrenched yet, we are none the wiser to second guessing who may join Mr Sentance’s team. Governor King’s thinking of course is yet to include any long lasting effect that may occur from the recent spikes in crude oil prices. Should they remain above $100 per barrel for both Brent and Nymex for any longer length of time, this may force Governor King to reconsider this perspective.

In terms of sectors, it is the mining sector that is dragging down most European indices today, which is of no real surprise given that this is an area most at risk when traders have a low appetite for risky asset classes.

On the upside, strong demand for Morrison’s has helped its share price to top the FTSE 100 leader board, rallying 2.4% in the process. Much of the strong demand for the supermarket’s shares has been born out forecast beating results. The firm reported that fourth-quarter like for like sales grew 0.5% and was looking to devote more space in its stores to non food items such as clothing.