Valencia, on the mid-Eastern coast of Spain, is noted for growing a sweet variety of orange. However, it yielded a more bitter fruit on Friday as news emerged that the region was in financial difficulty and would need support from Madrid. This and the continuing weakness of the Spanish Government 10-year bond (the yield at this stage standing at 7.2%) undermined sentiment in Europe and on Wall Street with index falls of 1% commonplace and Spain’s Ibex 35 Index closing 5.8% down at 6,246. That said, after some encouragement from corporate results, the S&P 500 and Dow Industrial indices still managed to record gains over the week of around 0.4% along with rises in France (+0.4%) and Germany (+1.1%). The FTSE 100 was marginally down (- 0.25 %) as pressure on the banks such as HSBC (-4.6% over the week) took its toll .
Indeed, on Friday, the shares of HSBC alone accounted for almost 12 of the 62 points fall in the FTSE 100 to the 5,652 level as concerns grew about enquiries into Libor ‘fixing’ and money-laundering monitoring offences. In the wider market, FTSE 350 life insurance group Resolution fell by 5.4% on announcing that it would not, after all, return around £250m to shareholders due to uncertainty about prospects. Below-expectation sales growth on reduced demand from Spain and Italy left Vodafone shares lower at 180p. Ongoing concerns about economic trends in China and their implications for demand for raw materials such as iron ore left mining groups lower. Rio Tinto closed almost 3% down while BHP was 1.5% lower. The deteriorating picture in Spain did not help the banks, already weakened for other reasons; both HSBC and Barclays lost 3% on the day.
The mood on Wall Street was weak from the start with the S+P 500 Index down 0.5% lower at the open on the weaker markets’ trend in Europe and a sharp fall in the Euro-dollar rate (to $1.21), towards its lowest level since early-June 2010 of $1.20/€ . Among the index heavyweights, Apple Inc lost 1.8% amid the ongoing legal wrangling with Samsung while IBM (-1.5%) gave back some of the gain it recorded after a positive earnings statement on Thursday. In the Google-Microsoft face-off, Google continued to attract support (+2.9%) but Microsoft fell 1.8%. Wall Street investors are now having to deal with a slowdown at home, which the Federal Reserve Bank does not seem likely to stem before the end of July, while the intractability of the problems in the Eurozone are becoming increasing apparent.
Though euphoria may be building in Britain on the back of Bradley Wiggins’ historic win in the Tour de France ahead of the start of the Olympics at the end of this week, it is not rubbing off on financial markets and Monday has started with a distinctly sinking feeling. While yellow was the colour that mattered on the Champs- Elysees yesterday, things are decidedly red today with European markets and the FTSE 100 down around 1.6% this morning and the Spanish IBEX 35 down another 3.7% after Friday’s pronounced sell-off. The yields on both the Spanish and Italian Government 10-year bonds have risen further and now stand at 7.4% and 6.4%, respectively. Just for good measure, the futures for U.S. equities are pointing to a fall of about 0.8% at the open. Both the U.S. and the U.K. will announce Q2 GDP numbers this week and general expectations are for confirmation of further economic slowdown.
The bad news is that the technicals, as they have been suggesting for some weeks now, are pointing to further declines to come so those able to short should be enjoying this. The good news, particularly for long-onlies would be that a cathartic sell-off would bring us back to the buying zone sooner rather than later. The risk is that we may actually get another fudge – but still predominantly on the downside – in the next week or so.
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