ECB on Hold, Spain Completes

Devan Biswas
04 Aug, 2011
New York City

European markets jitters dragged indexes lower for the third week in a row as Spain completed the sale of

[R]4:30 PM Frankfurt – European markets jitters dragged indexes lower for the third week in a row as Spain completed the sale of €3.3 billion of short term bonds. The yields on Italian and Spanish bonds declined after the auction. The ECB left its key lending rate at 1.5%. Swiss Re and Munich Re reported better than expected earnings.[/R]

The European markets extended losses of 11% in eleven days and traded near 11-month low. The index has been in a correction for the first in a year and has been struggling since its peak in May.

The European Central Bank left its key lending rate at 1.5%. The rate was left unchanged after an increase of 25 basis points last month and the decision was widely anticipated.

The Swiss central bank yesterday cut its interest rate target range to between zero and 0.25% from zero and 0.75%.

The euro continued to struggle against the euro and the yields on the Spanish and Italian bonds hovered near the record high in ten years. One euro fetched $1.413 and traded near its low against the Swiss franc.

Bond yields in Spain and Italy improved after Prime Minister Silvio Berlusconi in a speech to parliament said markets are incorrectly pricing the risks in bond markets and Italian families, corporations are strong and real estate flows are in balance and the government is pursuing prudent policies.

In Paris CAC-40 Index fell 35.99 to 1% to 3,417.16 and in Frankfurt DAX Index edged lower 69.42 or 1.05% to 6,571.17.

The benchmark indexes in Stockholm dropped 1.7%, in Athens plunged 0.9% and in Switzerland fell 0.6%. Milan index declined 2.5% and in Madrid decreased 1.8%.

Bond market jitters were eased after Spain completed the sale of Treasury auction but at a higher cost. The yield on 10-year bonds after the auction declined to 6.08% and similar Italian bond yields fell to 5.99%.

Spain completed the sale of €3.3 billion with a bid-to-cover ratio of two-to-one. The 2014 bonds of €2.2 billion fetched the yield of 4.813% from the 4.037% yield in the auction in June and €1.1 billion of 2015 bonds yielded 4.984%.

The bid-to-cover ratio for 2014 bonds was 2.1 compared to June auction of 2.5 and the ratio for 2015 bonds was 2.4.

Gainers & Losers

Rio Tinto declined 5% to 3,823 pence in London trading after the iron miner reported first half earnings increased 30% to $7.6 billion. The earnings were lower than $8.2 billion estimated by several analysts in Australia and London.

Rio Tinto also announced the plan to increase its share buyback program by $2 billion to $7 billion.

Veolia Environnement SA dropped 13% to €12.52 after the water company declared first half loss and may be forced to cuts dividend to shareholders.

Swiss Re gained 4% to Sfr42.89 after the insurer reported second quarter earnings of $960 million, ahead of expectations set by many analysts below $490 million.

Munich Re traded nearly flat after it reported second quarter net income of €736 million ahead of market expectations of €640 million.

ING gained 2.5% after it reported better than expected second quarter profit increase and first half net income surged more than four-fold.