Spanish bond slide hits global markets

A slide in Spanish stocks and bonds deepened yesterday as investors’ concerns that prime minister Mariano Rajoy may require international aid rattled international markets.

Spain, the eurozone’s fourth-largest economy, is in “extreme difficulty,” Mr Rajoy said, raising the likelihood of a bailout for the second time this week. The Ibex stock index slid 0.7% in Madrid.

Spain sold €2.59bn of bonds at an auction, the Bank of Spain said. That was less than the maximum target of €3.5bn. It auctioned €973m of five-year notes at an average yield of 4.32%. Investors bid for 2.46 times the amount of debt allotted. That compared with a bid-to-cover ratio of 2.59 at the previous bond auction on Mar 1.

A rally triggered by more than €1tn of ECB loans to the region’s financial institutions to stave off a credit crunch is running out of steam and, while Italian prime minister Mario Monti is pressing ahead with an economic overhaul, Mr Rajoy is failing to meet deficit targets amid a worsening recession.

“Stress has returned to the periphery of the euro area,” David Mackie, chief European economist at JPMorgan Chase, wrote in a note.

The Spanish auction “serves as a reminder to the market that Europe is still with us,” Mark Freeman, chief investment officer at Westwood Holdings Group in Dallas, said. “We still have a long way to go before things get worked out. The market has now moved significantly higher. But guess what, expectations are now much higher. What ultimately it’s going to take is much stronger corporate profits.”

US stocks fell, with the Standard & Poor’s 500 Index posting this year’s second-biggest decline, as SanDisk’s lower forecast dragged down technology shares.

Computer and software makers fell 1.4% as a group and were the biggest drag on the S&P500 among 10 industries as SanDisk, the biggest maker of flash-memory cards, tumbled 11%. Bank of America and JPMorgan Chase & slumped at least 2.2% as financial stocks slid.

The S&P 500 lost 1% to close at 1,398.96 in New York, retreating the most since Mar 6, when the benchmark index plunged 1.5% in its worst drop of the year. The Dow Jones Industrial Average slid 124.8 points, or 1%, to 13,074.75.

Fresh worries about the eurozone debt crisis and Britain’s economy meant London’s blue chip shares index also struggled.

Britain’s manufacturing sector failed to return to growth in the first two months of 2012, while France and Italy also saw their borrowing costs rise as nervousness about the strength of the eurozone economy gripped investors.

But the FTSE 100 Index closed up 19.9 points at 5723.7, as the grim sentiment in Europe was neutralised by more encouraging news from the US where unemployment claims hit a four-year low.

London’s leading shares index had been down by as much as 2% yesterday after the US Federal Reserve appeared to back away from providing additional emergency support to the world’s biggest economy, and concern grew about Spain’s prospects.

Banking shares were among the biggest fallers amid a Europe-wide sell-off of lenders.

— Bloomberg