Saturday, October 20, 2012

Europe Stocks Stay Up Despite Rising Yields

European stock markets were under pressure and Spanish bond yields surged to a euro-era high Tuesday as enthusiasm waned over the proposed €100 billion ($125 billion) bailout for Spain's banks.

The U.K.'s FTSE 100 index ended up 0.8% at 5473.74, France's CAC-40 closed up 0.1% at 3046.91, Germany's DAX edged up 0.3% at 6161.24 and Spain's IBEX-35 closed up 0.1% at 6522.50. The benchmark Stoxx 600 index ticked up 0.6% to close at 243.44.

Meanwhile, the Italian FTSE MIB index closed down 0.7% at 12979.69, and Greece's ASE index fell 1.4% at 489.35.

Stock markets plunged briefly into negative territory in afternoon action as the yield on the 10-year Spanish government bond leapt toward the critical 7% level. A sovereign yield level of 7% is widely considered unsustainable and has prompted bailouts of euro-zone countries, beginning with Greece. Spain's 10-year bond yield hit 6.80% while Italy's 10-year bond yield surged as high as 6.26%, its highest level this year, according to Tradeweb.

"Investors remain sceptical, and with good reason, that a recapitalization of the [Spanish] banking sector will necessarily transfer the burden of a guarantee away from the Spanish government; the potential for further credit downgrades has arguably increased," warned Ian Williams, economist and strategist at Peel Hunt.

Italy, which is the euro zone's third largest economy, came under scrutiny as investors have grown concerned that it too may need help from its European partners. A key test for Italy lies ahead, with an auction of up to €4.5 billion of three- and seven-year bonds scheduled for Thursday.

Italian banks were the biggest underperformers in the euro zone: Intesa Sanpaolo slumped 3.7% while UniCredit fell 3.9%.

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Spanish bank stocks were not punished as much as their Italian counterparts: Banco Santander fell 0.4% and Banco Bilbao Vizcaya Argentaria fell 0.2%.

Fitch Ratings downgraded Banco Bilbao Vizcaya Argentaria and Banco Santander by two notches to triple-B plus late Monday. Fitch said the move was linked to its earlier downgrade of Spain's credit rating. Fitch cut another 18 Spanish banks' long-term credit ratings on Tuesday.

However, the selloff in Spanish banks eased after the International Swaps and Derivatives Association announced that the Spanish bank bailout proposal is not likely to trigger a credit event due to subordination.

Adding to the gloom in Europe was news the Mediterranean island of Cyprus could become the fifth euro-zone country to seek help from the region's bailout funds. According to several European officials, the size of any bailout would be unlikely to exceed €3 billion to €4 billion.

Among individual stocks, shares in Dutch navigation maker TomTom increased 16.2% after it said it will provide maps for Apple's newly announced mapping service.

Defensives, such as food and beverage stocks, provided support for the pan-European Stoxx 600 gauge. Nestle rose 1.3%. Drug manufacturers also lent support, with Roche up 1.6% and Novartis rising 1.1%.

Meanwhile, E.ON was the biggest gainer out of the euro zone's blue-chip stocks, closing up 2% after being upgraded to buy from neutral by UBS.

And London Stock Exchange Group increased 1.1% after announcing that former Nasdaq OMX executive David Warren will replace Doug Webb as chief financial officer.

—Barbara Kollmeyer and Sara Sjolin contributed to this article.

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