European Markets Higher; Spain Debt Downgrade

Arthi Gupta, Mayank Mehta and Sanjay Barot
31 May, 2010
New York City

European stocks traded higher despite a downgrade of Spain''s sovereign debt rating. Euro-zone economic confidence deteriorated and inflation accelerates to 1.6% in May. Polish economic growth slows in the first quarter.

[R]5:00 PM Frankfurt, Paris; 11:00 AM New York. - European stocks traded higher despite a downgrade of Spain''s sovereign debt rating. Euro-zone economic confidence deteriorated and inflation accelerates to 1.6% in May. Polish economic growth slows in the first quarter.[/R]

European stocks traded higher despite a downgrade of Spain''s sovereign debt rating. Euro-zone economic confidence deteriorated and inflation accelerates to 1.6% in May. Euro-zone annual consumer price inflation edged up to 1.6% in May from 1.5% in April, a flash estimate from the European statistical agency Eurostat showed today.

Fitch Ratings downgraded Spain’s credit rating from AAA to AA+ but said the outlook was stable. The downgrade came after the Spanish government had to step in and save a regional bank last weekend, raising further questions as to the stability of finances in the country.

In London FTSE 100 Index traded lower 0.31 or 0.01% to close at 3,514.75, in Frankfurt DAX index higher 39.81 or 0.67% to close at 5,985.99. In Zurich trading SMI increased 12.73 or 0.20% to close at 6,334.65. Markets in the UK and U.S. were closed today.

Fitch Ratings downgraded Spain''s long-term foreign and local currency Issuer Default Ratings to ''AA+'' from ''AAA''. The rating outlooks on both Long-term IDRs were deemed “stable.” This comes a few weeks after S&P downgraded Spain one notch to AA from AA+ and kept a negative outlook.

According to Brian Coulton, Fitch''s Head of EMEA Sovereign Ratings, the downgrade is the result of Fitch''s assessment that the process of adjustment to a lower level of private sector and external indebtedness will materially reduce the rate of growth of the Spanish economy over the medium-term.

""Despite government debt and associated interest costs remaining within the AAA range, Fitch anticipates that the economic adjustment process will be more difficult and prolonged than for other economies with AAA rated sovereign governments, which is why the agency has downgraded Spain''s rating to AA+,"" Coulton noted

Despite the commitment to reduce the budget deficit, Fitch said government debt will likely reach 78% of GDP by 2013, compared to under 40% before the global financial crisis began in 2007.

Nonetheless, the agency noted that Spain''s sovereign credit profile remains strong and is underpinned by a high-income and diversified economy, a ''core'' financial sector that is sound, a relatively high national savings rate and a track record of responsible public finances including an unblemished modern debt-servicing record.

Fitch did keep Spain''s outlook ""stable,"" saying the country''s credit profile will remain very strong and consistent with its ''AA+'' rating, even in the event of some slippage relative to official fiscal targets.

Overall economic confidence dipped unexpectedly in May, with all sectoral sentiment indicators, excluding industrial morale, deteriorating in May. The economic sentiment indicator slipped to 98.4 in May from 100.6 in April, a monthly survey published by the European Commission said today.

Separately, the European Commission said the business confidence for the euro-zone improved in May, suggesting that economic activity in industry will continue to recover in the months ahead, although it has still some way to go to reach its pre-crisis height. The business sentiment index increased to 0.34 from a revised 0.28 reading in April.

Emerging countries are boosting the world economy despite being affected severely by the global crisis, U.S. Federal Reserve Chairman Ben Bernanke and European Central Bank President Jean-Claude Trichet said today.

According to the International Monetary Fund''s updated world economic outlook released in April, emerging and developing economies would grow 6.3% this year and 6.5% next year. Within this category, developing Asia, which includes fast-growing China and India, would lead expansion. The world economy is anticipated to recover by 4.2% this year, reversing 0.6% contraction recorded in 2009.

UK house prices rose only 0.2% in May as overall housing market activity remained subdued in the backdrop of the uncertain political scene earlier in the month following the general election, a survey showed.

While monthly growth in house prices stagnated at 0.2% in May, annual increase was 2%, according to data released by Hometrack today. In April, house price annual inflation was around 1.8%.

Data from British Bankers'' Association showed that the number of loans approved for house purchases totaled 35,729 in April, up from 35,044 in March. In March, mortgage approvals rose to 48,901 from 46,882 in February, a report from the Bank of England showed.

Swedish economic confidence posted marked improvement in May compared to April, indicating a stronger than normal sentiment among state enterprises and households.

The headline indicator rose to 110 in May from a revised 104.6 in April, the National Institute of Economic Research said Monday. Compared to the previous month, consumer confidence fell by 0.7 points to 18.8.

Poland''s economy expanded at a slightly slower pace in the first quarter, official data revealed.

The preliminary estimates of the Central Statistical Office said Monday that the gross domestic product grew 3% year-on-year in the first quarter after rising a revised 3.3% in the previous quarter.

The economy expanded a seasonally adjusted 0.5% sequentially, following a 1.1% rise in the previous quarter. Meanwhile, year-on-year, GDP rose 2.8% on a seasonally adjusted basis, unchanged from the December quarter.

BP Plc said that it discontinued the ""top kill"" efforts to stop the flow of oil from the MC252 well in the Gulf of Mexico since the operation failed to close the oil leak.

Actelios SpA and its parent Falck agreed to merge their green energy units, to help create Italy''s biggest listed renewable energy company.

Gainers & Losers

Deutsche Wohnen AG, the residential property developer fell 5.6% to €7.55.

Douglas Holding AG, the retailer rose 2.3% to €34.37.

Krones AG, the machinery manufacturer rose 1.5% to €39.96.

Manutan International SA, the seller of office equipment rose 3.3% to €46.00.

Technip, the oilfield-services company fell 0.6% to €52.93.

Vallourec SA, the producer of seamless steel tube products rose 1.4% to €153.80.

Volkswagen AG, the automobile manufacturer rose 0.8% €69.72.