Euro falls on debt worries over Spain's bank rescue
The euro sank against the dollar and yen on Monday as a brief spate of euphoria over Spain's bank bailout deal gave way to worry that the country is being saddled with even more debt, heightened by a wary mood days ahead of Greek elections. The euro zone agreement reached over the weekend to lend Spain, the region's fourth-largest economy, up to 100 billion euros to help prevent a run on its banks had initially spurred optimism. The euro <EUR=> had jumped more than 1 percent against the dollar to hit its highest level since May 23.
But gains were erased during the New York session as the deal's obligations came under the microscope. With the loans potentially lifting Spain's debt by as much as 100 billion euros and possibly ranking ahead of regular government debt in the queue for repayment, Spain's already high borrowing costs could rise further. "What the bailout deal has done is burden Spain's government with additional debt which the country is not in a position to handle," said David Pierce, director for business development at GPS Capital Markets in Salt Lake City, Utah. The firm advises corporate clients on managing currency exposure.
"I think Spain may have to increase the amount that it has to pay on its bonds," he said. EU and German officials said Spain faces supervision by international lenders, contradicting Spain's prime minister, Mariano Rajoy, who insisted the cash came without such strings. Investors fear that if the euro zone's future permanent bailout fund, the European Stability Mechanism, is used for the rescue, they will be subordinate to official creditors and face losses in any debt restructuring.
Spain bailout rally brief as Wall St slides
U.S. stocks fell on Monday as Europe's aid package for Spanish banks did little to alleviate investor concerns about the euro zone's finances and a slowdown in the wider global economy. The equity market bounced in early trading, but the rally was quickly snuffed out by sellers and a sharp decline accelerated into the market's close. Spanish bond yields rose as a bailout of up to $125 billion for the country's struggling banks failed to quell concerns that Madrid may be locked out of funding markets and forced to seek external help.
"They're borrowing more money, not doing anything about growth," Paul Zemsky, head of asset allocation at ING Investment Management in New York, said. "Today we're not worried about Spain's banking system falling off a cliff, but other than that, nothing has changed. "This is a realization that Spain, while providing money for its banks, is going to add to its debt-to-GDP ratio, and it's going to potentially subordinate some of the current Spanish sovereign debt, which doesn't make those bondholders happy," said Zemsky. The Dow Jones industrial average <.DJI> dropped 142.97 points, or 1.14 percent, to 12,411.23. The Standard & Poor's 500 Index <.SPX> fell 16.73 points, or 1.26 percent, to 1,308.93. The Nasdaq Composite Index <.IXIC> lost 48.69 points, or 1.70 percent, to 2,809.73.
Gold up but off highs as Spanish aid disappoints
Gold prices eked out small gains in choppy trade on Monday as safe-haven buying kicked in and a relief rally in other financial markets faded when investor enthusiasm about a European bailout for Spain's banks dried up.Investors sought refuge in bullion as deepening worry about saddling Spain with further debt of up to $125 billion knocked the euro off three-week highs and sent equities into retreat.
Gold veered away from its recent correlation with assets perceived as more risky. The euro <EUR=>, S&P 500 index <.SPX> and crude oil <LCOc1> all finished near session lows on the lingering European debt fears. The market was still vulnerable though. Disappointment about the small size of the bailout had left many investors unconvinced that Europe was committed to roll out more monetary stimulus to fix the crisis and sent gold briefly into negative territory to an intraday low around $1,583, traders said.
U.S. gold futures <GCQ2> for August delivery settled up $5.40 an ounce at $1,596.80, Prices were volatile with volume sharply lower than usual at about half of its 30-day average, preliminary Reuters data showed.
Crude ends lower, hits new 2012 low as rally fades
U.S. crude futures were lower for a third straight session on Monday, and set a new 2012 low in late trading, as an early rally on EU's rescue of Spanish banks faded amid investors raising questions about the aid package and focused on other troubled euro zone nations like Greece. Leading oil producer Saudi Arabia called for an increase in OPEC's output target, despite falling oil prices, further adding to bearish sentiment in the oil markets. The euro fell against the U.S. dollar and equities ended lower on disappointment over the Spanish aid package, to keep oil futures under pressure.
Also bearish for crude was news that an outage at a new crude distillation unit at Motiva Enterprises' 600,000 barrels per day refinery in Port Arthur, Texas, -- the nation's largest -- would be offline for at least two months and potentially five months, for repairs, sources familiar with operations said. On the New York Mercantile Exchange, July crude <CLN2> settled <CLN2> settled at $82.70 a barrel, down $1.40, or 1.66 percent, after trading between $82.58 and $86.64.
Nikkei set to fall, Spain rally short-lived
Japan's Nikkei share average is likely to dip on Tuesday after a brief rally greeting news of a Spanish bank bailout sputtered out overnight, as the deal failed to overcome nervousness about the future of the euro zone. Investors were temporarily cheered on Monday after euro zone finance ministers agreed to loan Spain $125 billion to recapitalize its troubled banks, but the relief was outweighed on U.S. markets by caution ahead of a Greek election on Sunday. Market players said the Nikkei was likely to trade between 8,400 and 8,550 on Tuesday after closing at 8,624.90 on Monday as investors welcomed the bailout.
Nikkei futures in Chicago <0#NIY:> closed at 8,465, down 1.7 percent from the close in Osaka <JNIc1> of 8,610. Exporters may be out of favour as the yen strengthened overnight, The Nikkei managed to snap nine straight weeks of losses last week, its worst run in 20 years, after the broader Topix <.TOPX> hit a 28-year low. The Nikkei has fallen 15.9 percent from its one-year high of 10,255.15 on March 27, on fears of a deepening euro zone debt crisis and slowing growth in the U.S. and China.
Seoul shares set to fall on worries over Spain deal
Seoul shares are seen retreating on Tuesday from a 4-week closing high after the optimism about a euro-zone deal for Spanish banks proved short-lived as investors fretted over the details of the bailout plan. Adding to the gloom, a Greek election on Sunday could put Athens on a path to leaving the euro currency bloc. Cyprus, deeply exposed to Greece, hinted on Monday that it may become the fifth member of the 17-nation euro area to apply for an international bailout.
"Investors are fearful of the added public debt pressure on Spain if loans are tapped from the European Stability Mechanism, which must be repaid in full over its debt obligation to private bondholders," said Choi Chang-ho, an analyst Shinhan Investment & Securities. The Korea Composite Stock Price Index (KOSPI) <.KS11> rose 1.7 percent to close at 1,867.04 points on Monday.
