European stocks tumble as Spanish Government yields rise

Global sentiment has taken a turn for the worse as positivity regarding recent central bank stimulus measures continues to fade and concerns over global growth and Eurozone debt crisis take centre stage.

The sharp losses on the European markets this morning were inspired by steep losses on Wall Street after Federal official Charles Plosser said, ‘We are unlikely to see much benefit to growth or employment from further asset purchases.’ Although as a leading hawk these comments that the programme is unlikely to be effective may not come as a huge surprise, they do break the idea that Bernanke has created a consensus among his Federal Reserve Colleagues. Following these comments the S& P experienced its worst day since June last year.

Spanish borrowing costs have surged again this morning after Catalonia announced a snap election, which could possibly lead to independence for the country’s most economically important region. Yields on the 10-year Spanish bond rose to 5.93% whilst the IBEX lost over 2.25% on the news.

With bond yields raising higher, the question on every trading floor is when will Rajoy request the bailout? We have seen that ECB President Draghi has attempted to keep yields at a stable level by promising to do ‘whatever it takes’ however, the country must request a formal bailout before the ECB will intervene.

The markets want Rajoy to ask for assistance – gold, equities and bonds will all do well when money is pumped into the economy. However, he won the election pledging not to ask for help – breaking such a high profile promise will not be well received.

Furthermore will regions start to believe they can escape ECB austerity measures by breaking free from Spain such as in Catalonia? Every leader who asks for a bailout loses power in the next election. These thoughts will without doubt be central for Rajoy and although a request for a bailout might make economic sense, it definitely does not make political sense for Rajoy.

So whilst this standoff ensues and the Spanish Government presses on with delay tactics, the markets will continue to suffer. As we would expect riskier assets are suffering the most at the hands of investors, with mining stocks and banking stocks heading up the worst performers.

Looking towards the afternoon German Consumer Price Index and US New Home Sales will be the short term focus for traders.

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