Stocks and euro fall as investors fear details of €100bn Spanish bailout

Stocks and the euro fell yesterday as investors worried about details of a €100bn deal to shore up Spain’s banks, prompting traders to cash in hefty gains triggered by the widely expected deal.

Wall Street traded lower after closing its best week of the year on Friday, gaining almost 4%, on hopes of the bailout for Spanish banks.

Spanish bond yields rose as investors worried about the source of funds for the deal, and whether it will add to the country’s debt burden.

The deal, struck by eurozone finance ministers over the weekend, was also seen as a temporary solution that does not address the question of how to kick-start growth in the eurozone’s fourth-largest economy.

“This is a classic case of the market rallying on the expectations and then selling off on the reality,” said Michael Yoshikami, CEO at Destination Wealth Management in California.

“The news from Spain, while it avoids a crisis, still underscores there are major problems in Europe and we need to see additional action from Europe to stabilise the eurozone.”

Highlighting the un-certainty, EU and German officials said yesterday Spain would face supervision by international lenders, contradicting comments from Spanish prime minister Mariano Rajoy.

Adding to the gloom, a Greek election on Sunday could put Athens on a path to leaving the currency bloc. Cyprus, deeply exposed to Greece, hinted yesterday it may become the fifth eurozone member to apply for an international bailout.

The Euro STOXX 50, the eurozone’s leading index of blue-chip shares, fell 0.3% and Spain’s IBEX 35 was down 0.5%.

In Dublin the ISEQ was down 5.29, 0.177%, to 3,042.88, while in London the FTSE 100 was down 2.71, to 432.37, in Paris the CAC 40 was down 8.9 to 3,042.8, while in Frankfurt the Dax traded up 0.23 at 6,141.05.

Global shares as measured by MSCI gained 0.3% with overnight help from Asian markets. As the euphoria faded, the euro gave up its gains against the US dollar.

It last traded around $1.24.94 after hitting a near three-week high of 1.2668.

“The deterioration in euro sentiment following Spain’s bailout news is a clear indication of the extent of negativity surrounding the currency,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

“The lack of details about the plan quickly saw market optimism fade, pushing yields on Spanish debt higher and that added to negative sentiment,” he said.

Copper prices rose 1.6%, supported by data showing China’s May imports of the metal climbed nearly 12% from April. The data, however, also showed China’s inflation, industrial output and retail sales flagged in May for a second straight month.

Scepticism about the ability of the weekend deal to stop the spread of the debt crisis in Europe was evidenced in renewed appetite for safe-haven US Treasuries. The benchmark 10-year US Treasury note was up 6/32, with the yield at 1.6097%.