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While you were sleeping: Spain rains on optimism

Wednesday 11th April 2012

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Concern plagued Wall Street and European equity markets as renewed worry about Spain's solvency flares and investors gear up for the start of the US first-quarter earnings season.

In Europe, the Stoxx 600 Index resumed trading after a four-day weekend and ended the session down 2.6 percent. In afternoon trading in New York, the Dow Jones Industrial Average dropped 1.47 percent, the Standard & Poor's 500 Index fell 1.75 percent and the Nasdaq Composite Index weakened 1.60 percent.

The S&P 500 sank as low as 1,357.38, sliding below its 50-day moving average of 1,372.30.

"Dropping below that level suggests a loss of momentum, and it looks pretty widespread," Katie Stockton, chief market technician at MKM Partners in Greenwich, Connecticut, told Reuters.

Investors are focused on Alcoa which will unofficially start this earnings season when it releases its results after the market close.

A Reuters poll on Monday showed most major Wall Street banks expect anaemic growth in the US job market and a struggling economic recovery to force the Federal Reserve to undertake another round of monetary stimulus.

Meanwhile, renewed concern about Spain's crippling debt load and the need for another financial rescue within the euro zone bolstered demand for the perceived safety of US government debt.

The Treasury sold US$32 billion of three-year notes, with the class of bidders that includes foreign central banks taking 40 percent of the debt, its largest share since August, according to Bloomberg News. The notes drew a yield of 0.427 percent.

The Treasury is set to auction US$21 billion of 10-year securities tomorrow.

“It’s definitely a risk-off day,” William O’Donnell, head US government bond strategist at Royal Bank of Scotland Group’s RBS Securities in Stamford, Connecticut, one of the primary dealers required to bid at the auctions, told Bloomberg. “We think it’s going to continue. The return of European stress has legs.”

That stress was certainly reflected in Spanish bond yields as the Spanish government discussed more cuts in spending in an effort to reduce the nation's deficit. The yield on the country's 10-year bonds rose for a fourth day, climbing 23 basis points to 5.99 percent.

Spanish banks may need additional capital if the economy “worsens more than expected,” Bank of Spain Governor Miguel Angel Fernandez Ordonez said today, warning the recovery will be slow.

If the economy “finally recovers, what has been done will be more than enough.”


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