Surging Spanish bond yields push Europe lower

Spain bond yields take out last autumn’s highs

 By Barbara Kollmeyer and Sara Sjolin, MarketWatch

LONDON (MarketWatch) — A sudden late-day surge in Spanish bond yields to all-time highs put sovereign fear and contagion risks back on center stage for the euro zone Tuesday, as Italian yields also climbed and stocks erased earlier gains.

The Stoxx Europe 600 index slipped 0.2% to 241.33, after trading as high as 243.29. 

Stocks changed direction in late action as the yield on 10-year Spanish government bonds surged to an all-time high, up 27 basis points to 6.80%, according to electronic trading platform Tradeweb.

The IBEX 35 index erased earlier gains and lost 1% to 6,451.40.

Spanish stocks on Monday led a volatile session with the main index shedding all of what at one point was a nearly 6% gain as investors expressed disappointment over a plan for the European Union to loan as much as €100 billion ($125 billion) to the troubled banking sector.

“This solution is still some way off,” analysts at Credit Suisse said in a note. “Spanish GDP could end up falling another 5% on account of fiscal tightening, private sector leveraging, bank deleveraging and falling wages. This will have a negative impact on the fiscal arithmetic and credit quality.” 

“We think Europe is only half way through resolving the crisis,” the analysts added. “In particular, we believe that we will need an ECB [European Central Bank] deposit guarantee or a €2 trillion 5-year LTRO [long-term refinancing operation]. 

Banks in Spain were also lower. Bankinter SA dropped 4.8%, Banco Popular Español SA lost 4.7% and Bankia SA fell 2.2%.

Italian banks were also lower: Banca Monte dei Paschi di Siena SpA lost 5.8%, Intesa Sanpaolo SpA gave up 4.7%, while UniCredit SpA dropped 5.2%. 

The FTSE MIB index slipped 2.1% to 12,803.45, as yields on 10-year Italian government bonds surged 16 basis points to 6.19%.

“Markets are concerned that it’s not clear how the intervention for Spain will be financed, so they are afraid there will not be anything left for Italy if it needs help,” McLean from SVM Asset Management said. “The pool of potential contributors to the rescue funds narrows each time a new country runs into problems and now Spain is asking for money. We’re left with Germany and to some extend France to contribute.”

“There’s belief that at some stage we’ll get a big intervention and the ECB will start printing money. There will be a recognition of the seriousness of the problems and that there’s a need for quantitative easing,” he added.

Movers

Defensives, such as food and beverage stocks, provided support for the main Stoxx 600. Nestle SA was up 0.9%.

Julius Baer Gruppe AG  rose 1.8%, after UBS lifted shares of the private bank to buy from neutral.

Amlin PLC rose 1.1% after the insurance and reinsurance group was upgraded to buy from hold at Deutsche Bank.

Among other indexes, the FTSE 100 index added 0.1% to 5,440.53, also helped by defensive stocks such as British American Tobacco PLC, 0.9% higher.

Miners such as BHP Billiton PLC  supported London, up 0.8%, while Anglo American PLC gained 1%.

Data for the U.K. showed the seasonally adjusted index of production stayed unchanged for April on a monthly basis, although the index dropped for a 14th consecutive month year on year.

The French CAC 40 index fell 0.4% to 3,029.96, with banks Credit Agricole SA  off 3.2% and Société Générale SA down 1%.

Cement maker Lafarge SA added 1.1% as it announced a plan to reduce costs by €1.3 billion over the 2012-2015 period.

The German DAX 30 index lost 0.3% to 6,121.5. It was led by 2.3% loss for Infineon Technologies and Commerzbank AG  down 1.8%.

E.ON AG rose 1.4% after the utility was upgraded to buy from neutral at UBS.

TomTom NV shares leapt 14% as the Dutch provider of navigation technology announced a mapping-data deal with Apple Inc. 

Barbara Kollmeyer is an editor for MarketWatch in Madrid. Sara Sjolin is a MarketWatch reporter, based in London.