European Indexes Slide 2% and Bond Yields Rise

Arthi Gupta
21 Nov, 2011
New York City

European indexes slumped more than 2% as bond yield continue to rise. Spain

[R]1:25 PM Frankfurt – European indexes slumped more than 2% as bond yield continue to rise. Spain’s Popular Party won a governing majority after a general election today but bond yield rose. The European Union agreed for a 2% rise in 2012 budget to €129 billion.[/R]

European indexes edged lower on the deteriorating sovereign debt crisis in the region. Spain was the third nation in two weeks to change its government and the U.S. political parties are expected to not reach an agreement before the Monday deadline.

In early European trading, indexes slumped more than 2% reflecting the downbeat investor sentiment.

The U.S. Congressional Super Committee may fail to reach a consensus before the deadline today to cut government spending by $1.2 trillion. Bi-partisan commission saw no urgency to compromise on budgetary cuts and new revenues measures as both parties dug heels ahead of the election next year and see which party has an upper hand.

EU Agrees for 2% Rise in 2012 Budget

The European Union settled for a 2% increase in its budget for 2012 to €129 billion, less than the 5% increase it preferred. The decision was arrived at after talks that lasted about 15 hours.

Majority of the EU budget is spent for agricultural subsidies and to aid funds that finance projects such as construction of roads and environmental projects.

UK, the member of EU demanded more cuts in agricultural spending but supported higher defense spending for invasions in Africa and Libya.

Spanish Elects New Government

Popular Party won the parliamentary elections in Spain with an overwhelming majority. Mariano Rajoy led party won 186 of the 350 seats in Congress compared with 110 for the ruling Socialist Party.

Alfredo Perez Rubalcaba, replaced Jose Rodriguez Zapatero in an election was that scheduled earlier than March deadline as financial crisis brought to an end of the economic boom after housing market collapsed and unemployed soared to the highest 21% in the European Union.

The new government is facing multiple tasks on several economic fronts. Spanish bond yields soared in the last five months and last week briefly surged above record Italian yields.

Rajoy, 56 years of age lost the previous election in 2008 against Prime Minister Zapatero and in the last days of campaign asked Spaniards to make a collective efforts to fight the “most difficult economic situation that Spain has faced in three decades.”

However, bond market lost most of the rally last week and yield on 10-year bond rose 17 points to 6.53% and spread to German bunds widened to 466 basis points. The yield last week traded at a record high of 6.74%.

Mario Monti Wins Confidence Vote

Italy''s Prime Minister, Mario Monti, won the vote of confidence for his new government in the Chamber of Deputies, by a 556-to-61 vote.

Monti will meet with European Council president Herman Van Rompuy and European Commissioner Jose Manuel Barros in Brussels on Tuesday.

German banks have significant exposure to debt-stressed countries like Greece, Italy, Portugal and Spain amounting to €327.9 billion, according to latest reports from credit rating agency Moody’s.

Separately, Moody’s believes the recent rise in interest rates on French government debt and weaker economic growth prospects could be negative for France’s credit rating, newspaper Le Figaro on Monday reported the agency as saying.

The yield on 10-year French government bonds rose 6 basis points to 3.51% today, according to reports.

Germany will drop its opposition to the eurobonds once stricter budget oversight rules are in place, EU internal market commissioner Barnier told TV5 on Sunday.

In Paris, the CAC-40 Index declined 74.40 or 2.4% to 2,922.61 and in Frankfurt; the DAX Index edged lower 152.18 or 2.6% to 5,647.60.

Japan’s merchandise trade deficit was 273.79 billion yen in October, following the downwardly revised surplus of 296.2 billion yen in September, the Ministry of Finance said on Monday. Exports fell 3.7% and imports surged an annual 17.9% in October.

Overseas shipments to China fell 7.7% while those to U.S. dropped 2.3%.

The data partly reflected production problems for Japanese companies due to the recent floods in Thailand.

Centrica Inks Deal with Statoil

Centrica plc signed a strategic agreement with Statoil ASA for the supply of 50 billion cubic meters of gas to the UK. The 10 year, NBP-linked gas supply contract worth £13 billion begins in 2015 and secures sufficient gas to meet around 5% of total UK annual demand, enough for 3.5 million homes.

The company has separately agreed with Statoil Petroleum AS to acquire producing and development assets in the Norwegian North Sea for £1 billion.

Gainers & Losers

Actelion Ltd. fell 2.6% to Sfr30.05 after the Swiss biopharmaceutical company confirmed its intention to appeal the entire verdict by a Californian court in its licensing dispute with Japan''s Asahi Kasei Pharma Corp. after the original jury verdict was reduced by almost $170 million.

Carrefour SA, the France based international hypermarket chain dropped 2% to €18.06 on speculation that its key shareholders are contemplating management changes.

Koninklijke Ahold NV dipped 0.5% to €9.39 after the Dutch retail group unveiled a new dividend policy and said it intends to triple online sales to €1.5 billion in 2016.

Legrand SNC, the France-based company declined 3% to €23.04 after a broker lowered its view.