European shares were set to track Asian peers lower, with spreadbetters predicting major European markets to open down as much as 0.4%. But US stock futures were up 0.4%.
Investors worry that the weekend deal could further aggravate Spain’s rising public debt, even as attention turns to problems in Italy and a June 17 election in Greece that could determine the fate of the common currency bloc.
MSCI’s broadest index of Asia-Pacific shares outside Japan eased 0.7%, after posting its biggest daily gain in almost five months in the previous session.
Japan’s Nikkei average slipped 1.3%, after Wall Street fell sharply in a late sell-off.
Australia bucked the trend and gained 0.2%, pulled higher by a jump in Qantas after the airline
took steps to defend itself against a possible hostile takeover.
“The recapitalisation (efforts) for Spanish banks were crucial in that, without it, the probability of a disorderly default was much, much higher and the ramifications for banks much greater,” said Pranay Gupta, Swiss private bank Lombard Odier’s chief investment officer for Asia.
“But all it did was put a bandage on the wound. It did not heal the wound,” he said.
“Optimism disappears when reality bites. The focus is turning from one country to another,” he said, adding that in a month’s time, Italy may be in the headlines just as Spain had been.
The euro, which hit its highest since May 23 of US$1.26694 yesterday, last stood at US$1.2496.
Oil extended losses after tumbling 3% yesterday, with US July crude slipping to this year’s low of US$81.07 before paring some losses to stand down 0.7% at US$82.13 a barrel.
Brent crude fell 1.4% at US$96.62, also near the year low of US$95.63, before recouping some losses to stand down off 0.3% at US$97.70.
“We will see this kind of volatility because of the uncertainty over Greek elections, lack of clarity on the length and breath of the Spanish bank bailout,” said Ben Le Brun, a Sydney-based markets analyst at OptionsXpress. “I am not surprised to see the pull back in oil prices.”
Lacking details spooks
European officials agreed on Saturday to lend Spain up to 100 billion euros (US$125 billion), a move which should have made Spanish bank debt look less risky. But investors soon began to worry about details such as how the deal would be structured and whether it would come with conditions.
Investors also worried that if the euro zone’s future permanent bailout fund, the European Stability Mechanism, is used for the rescue, they will be subordinate to official creditors and face losses in any debt restructuring. Risks of further credit rating cuts would keep borrowing costs elevated.
“The ‘risk-on’ trade is over as investors look to the Greek elections and Italy,” said Jeff Sica, president of SICA Wealth Management, which manages more than US$1 billion in client assets,
real estate and private equity holdings.
“This weekend’s bailout news does not imply a serious willingness on the part of Europe to tackle its financial crisis but instead implies an act of desperation to delay the inevitable which is the failure of Spanish banks,” he said.
He added that while further economic stimulus could offer potential upside for global equities markets, it would only set the markets up for a greater fall in the future as such stimulus measures could not accomplish much in the long term.
The rescue for Spain’s banks follows bailouts for Greece, Ireland and Portugal since 2010, and comes a week before a crucial election in Greece that could determine whether Athens will stay with the euro bloc.
Cyprus, which is deeply exposed to Greece, strongly hinted yesterday that it may apply for an international bailout before the end of this month, both for its banks and for the state.
One of the gauges for investor confidence will be a debt auction on Thursday by Italy, which said yesterday it would offer up to 4.5 billion euros of fixed-rate bonds (BTPs) at its regular mid-month auction on June 14.
Renewed market concerns about the government’s ability to finance its rising public debts pushed Spanish 10-year bond yields up 25 basis points yesterday to 6.5%, on course for their worst day since early April.