Spain continues to dominate investor s thinking as quarter ends

The issue of Spain and whether the indebted country where 1 in 4 adults are unemployed will seek a fully fledged bailout to use the funds of the ESM remains on investor’s minds as the quarter ends today.

The FTSE 100 traded marginally higher by 6pts to 5785 whilst broader European stock indices suffered losses of around 0.5%, with the Spanish IBEX losing 0.86% ahead of the release of banking stress tests.

Spanish Prime Minister Mariano Rajoy announced yesterday further austerity plans in an effort to save a further €13bn in 2013 through a 7.3% cut in spending and a 4% rise in income thank in part to increasing the rate of value added tax. The reaction to Spain’s latest budget is somewhat mixed. Some of the cuts and income increases is being seen as fairly optimistic by a country saddled with high unemployment and remains entrenched in recession.

On the other hand, many are seeing these further cuts as paving the way for further liquidity assistance from the ECB’s recently announced Outright Monetary Transactions (OMT) as they help to cover many of the pre-conditions that would likely come with financial assistance. Indeed, with some speculation (and only mere speculation at this point) over the past few weeks that Spain had already been gaining insight to the likely conditions, it may well be the case that this latest budget already includes much of definitive conditions required and this paves the way for Spain to seek a fully fledged bailout.

Eyes continue to focus towards Spain after the European close, where the final stress tests on Spanish banks from Oliver Wyman will detail just how much of a liquidity gap there is. The market is expecting this to fall within the €60bn-€70bn range and it will be interesting to see how much of a deviation there is from original projections made in the first stress tests during the summer. Many traders are looking ahead to the announcement in the afternoon and refraining from adding too aggressively to their risk exposure until they see what the results show.

Francois Hollande, the Socialist French President today announced more harsh tax hikes in an effort to reduce the country’s debt to GDP ratio from 4.5% to 3% next year. In one of the most highly contentious budgets from the first socialist President in a decade, the package sought t recoup €30bn but the concern would be that this budget is too aggressive and with further hikes to the tax rate, it could scare away business from the country and make it more difficult for France to achieve its growth target of 0.8%.

It is quarter end in Europe too and so there is a fair degree of position settlement and portfolio adjustments being made today as fund managers and investors set their positions up for the new quarter ahead. This is also making trading fairly choppy too.