Stock markets, euro hit by Spanish and Greek concerns

European shares fell on Tuesday and sterling rose to a 2-1/2 month high against a struggling euro as Greece’s ongoing debt drama offset bumper airline results.

The dollar drove the euro below $1.09 for the first time in a month.

Although Monday’s poor local election result for the Madrid government had already hit Spanish stocks, trading had been thin with bourses in London, Frankfurt and New York shut.

At 0749 GMT, the pan-Europe FTSEurofirst 300 was down 0.4 per cent. Spanish banks were among the biggest underperformers, with shares of Popular, Sabadell and Caixabank down 1.8 to 2.2 per cent.

Tuesday also saw the first reaction to the vote from bond markets, with Spanish 10-year yields hitting their highest in nearly a week. The country’s ruling PP party suffered its worst defeat in over 20 years in local elections, reflecting voter discontent at four years of austerity.

"Markets are trying to digest what is going on in Spain and what it means for Greece, " said Michael Hewson, CMC Markets analyst. "Anti-austerity parties in Spain have been giving the incumbent government a kicking ... That's keeping investors on the back foot."

Greece’s volatile shares were higher despite the country’s ongoing stand-off with international creditors. Greece intends to make good on debt obligations but needs aid urgently to be able to do so, the government said on Monday.

A rise in profits after a bumper year for Ryanair propelled the airline’s stock almost 5 per cent higher. Aer Lingus shares were also up after the Taoiseach said the government would discuss the sale of its stake in the airline.

Shares of French telecoms group Altice fell more than 1 per cent after bid rival Charter Communications neared an agreement to buy Time Warner Cable, people familiar with the matter said.

Italy’s Monte dei Paschi di Siena fell as much as 8 per cent in early trade and were suspended from trading on the second day of the Italian bank’s €3 billion cash call. Trading in the rights to buy into the share issue was also halted.

Yields on safe-haven German Bunds, the euro zone benchmark, dropped as jitters from the peripheral bond markets made investors nervous and pushed them towards safety. The yield gap between the 10-year UK Gilt and the German Bund widened to 135 basis points from around 123 bps on May 15th, driving sterling higher, traders said.

The euro fell 0.4 per cent to 70.645, its lowest since March 12th and down 3.2 per cent against the British pound so far this month.

The euro has been hit in recent days by a senior European Central Bank official flagging the possibility of aggressive bond buying and continuing worries over Greece's ability to make repayments to creditors.

“Things look grim for the euro right now,” said Marshall Gittler, head of global FX strategy at IronFX Global. “It is questionable whether Greece can make the payment due to the IMF on June 5th, followed by another large payment on June 12th. It will be touch and go.”

Greece must repay four loans totalling $1.76 billion to the IMF next month. Athens has the money to make monthly wage and pension payments this week, a government spokesman said on Monday. But he was less direct when asked about the June 5 payment, reiterating the government’s stance that it has the responsibility to pay all its obligations. Sterling, though, underperformed a buoyant U.S. dollar which extended gains after a stronger than expected rise in U.S. core consumer prices in April revived bets that inflation may reach the Federal Reserve’s 2 per cent target. If the upturn continues, it could allow the Fed to consider raising interest rates this year, providing a boost to the dollar.

Reuters