By Sara Sjolin
Spanish and Italian bond yields surged on Monday after a choppy session, where European stock markets erased earlier gains as investors questioned the details of Spain's bank aid-deal, while worries about Greece stirred uncertainty.
The Stoxx Europe 600 index closed slightly lower at 241.92, coming off its session high of 246.62.
News over the weekend that Spanish Finance Minister Luis de Guindos asked the European Union for as much as 100 billion euros ($125.3 billion) in loans to help the struggling banks prompted investors to jump into European equities early in the session. The aid will be provided by the European Financial Stability Facility and the European Stability Mechanism.
"While we believe the latest developments certainly do provide for some real comfort this time, it's not the absolute game-changer that the euro-zone crisis needs to be resolved," analysts from RBC Capital Markets said in a note. "This will effectively increase the Spanish debt-to-GDP ratio but how this will impact the cost of funding for Spain in the medium term remains to be seen."
Yields on 10-year Spanish government bonds surged 23 basis points to 6.42%, according to Tradeweb. A basis point is one one-hundredth of a percentage point.
Spanish stocks ended the session on a down note, after rallying almost 6% at the market open. The IBEX 35 index closed 0.5% lower at 6,516.40.
Markets started to curb the initial euphoria in afternoon action, as questions about deal details and whether Spain will be asking for the maximum amount of EUR100 billion stirred uncertainty.
A report from the International Monetary Fund showed last Friday that the Spanish banking system would need EUR40 billion to meet international standards inf the event of economic shocks.
Italian stocks trailed the rest of Europe, as the country's banks came under heavy selling pressure. UniCredit SpA lost 8.8%, and Banco Popolare SC and Intesa Sanpaolo SpA both slid 5.9%. The FTSE MIB index lost 2.8% to 13,070.75.
Yields on 10-year Italian government bonds jumped 27 basis points to 6.02%, according to Tradeweb.
"Focus has now shifted from Spain and markets are starting to raise questions about the Italian banking system and the Italian economy," said Stephen Pope, managing partner at Spotlight Ideas. "It's a case where Italy has the same government debt problems that Greece has combined with the banking sector problem that Spain has."
The euro also erased earlier gains and moved down to $1.2495 from $1.2512 late Friday in North American trading.
In the U.S., stocks were lower on Wall Street, while Asian bourses closed the day with solid gains.
Equities are likely to fall further at the end of the week, as the Greek election on Sunday could shake up markets again, Jonathan Bristow, broker at Valbury Capital, said.
"From Wednesday we might find investors reluctant to do anything and there'll probably be a selloff on Friday. I wouldn't want to hold any European equities or bonds over the weekend, because of concerns about Greece," he said. "It's such an important outcome, so you're better off getting out of your positions on Friday. It doesn't matter if you miss the start of the move after the election, because it will be big move whether [the election results] will help Greece stay in the euro or get it kicked out," he added. "If you're on the wrong side, it's quite hard."
Investors were also looking to Asia, where a mixed bag of economic data out of China over the weekend fueled speculation of further easing from the Chinese government. Last week, the People's Bank of China surprisingly cut interest rates for the first time since 2008.
"With increasing downside risk globally and domestic inflationary pressure easing fast, monetary and fiscal policy are now being eased more aggressively," analysts at Danske Bank said in a note. They forecast the central bank will cut leading interest rates twice by 25 basis points before year-end.
In the rest of Europe, stock markets painted a mixed picture. In Germany, the DAX 30 index gained 0.2% to 6,141.05 as car makers Volkswagen AG moved 1.3% higher. Data showed global car sales at BMW AG and Volkswagen AG's Audi brand reached new monthly record highs in May, as surging demand in China more than offset dampened demand in Europe.
Shares of BMW were, however, off 0.1%.
Among U.K. stocks, some banks and oil firms advanced. Oil group BP PLC gained 1.4%, while Lloyds Banking Group PLC ticked 1.7% higher and HSBC Holdings PLC climbed 0.5%.
The gains weren't enough to keep the FTSE 100 index afloat, the index losing 0.1% to 5,432.37.
In France, the CAC 40 index slipped 0.3% at 3,042.76, as banks tripped. Credit Agricole SA fell 3.7%, Societe Generale SA lost 3.1% and BNP Paribas SA gave up 1.7%.
Write to Sara Sjolin at AskNewswires@dowjones.com
(END) Dow Jones Newswires
June 11, 2012 13:06 ET (17:06 GMT)
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