From relief to despair as election rally dies

 
Julian Harris
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PRES

PRESSED markets quickly thudded back down to reality yesterday after a relief rally on the back of Greece’s elections results proved short-lived.

Despite equities soaring on the news that the pro-bailout New Democracy party had scraped its way to a narrow victory in Sunday’s vote, ongoing worries over the future of the single currency soon weighed on investors’ sentiments.

As Greek coalition talks rumbled on, stocks pared earlier gains while the euro itself lost ground from a one-month high against the dollar. New Democracy hopes to form a majority government with the pro-bailout socialist Pasok party, but was yet to conclude talks last night.

And even if a coalition is successfully formed today, wider concerns over the debt crisis continue to plague the Eurozone.

“We have avoided ‘drachmageddon,’ but we’re still in a very weak situation,” said Steven Bell, a hedge fund manager at GLC. “It’s almost like: ‘Let’s move on from Greece and let’s focus on Spain’,” he said.

The Bank of Spain revealed yesterday that bad loans had grown to 8.72 per cent of total lending in April, the country’s highest level for 18 years, extending the troubled Eurozone state’s recent string of gloomy news.

With fears rising over the state of the country’s financial sector, Spain plans to channel European aid into the banks.

Yields on government 10-year bonds shot up to touch 7.3 per cent during the day’s trading, before easing slightly to 7.16 per cent – a rise of 28 basis points.

Some investors fear that seven per cent is the point of no return for troubled Eurozone states’ yields, after which they are in danger of spiralling upwards.

Italian yields also continued their upward trend, reaching 6.08 per cent after gaining 15 basis points during the day.

And internationally, markets were knocked by bearish sentiment. Oil, following early gains stimulated by the Greek election result, sank back down. Benchmark Brent crude printed $96.05 a barrel, registering prices as low as they have been since January.

The Eurozone’s blue chip Euro STOXX 50 index ended down 1.2 per cent at 2,155.64 points, despite spiking on the early news.

Spain’s IBEX and Italy’s FTSE MIB indices fell three per cent and 2.9 per cent respectively, weighing heavily on pan-European measurements of equity prices – and were themselves dragged down by under-pressure banking stocks.

Bankia ended down 8.7 per cent, UniCredit lost 4.3 per cent and Banco Santander shed 4.6 per cent during trading hours.

In London, the FTSE ended up narrowly, rising 0.22 per cent to close on 5,491.09.

Yet the index lost most of the ground gained earlier in the day, when it had spiked on opening to touch levels around 5,550.

“The Greek vote has just been a sideshow on the Eurozone debt crisis. Investors’ focus is now back on the structural problems faced by both Italy and Spain,” said Natixis analyst Alex Koagne.

MARKETS REFLECT ONGOING EUROZONE WORRIES

ITALY’S
YIELDS NOW AT 6.08%

SPAIN’S
YIELDS NOW AT 7.16%

The euro dipped against the dollar

Brent crude in London sank by $1.56 a barrel
$96.05 a barrel