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updated: 9/28/2012 7:40 AM

Markets falter as focus remains on Spain

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  • An investor looks at the stock price monitor at a private securities company .

      An investor looks at the stock price monitor at a private securities company .

 
Associated Press

LONDON -- Markets stuttered Friday as investors continued to fret over the economy of Spain, which this week announced big spending cuts it hopes will convince potential bailout creditors and investors it has a rock-solid plan to heal its public finances.

The positive momentum generated by Thursday's Spanish budget has ground to a halt as investors await more news out of the country, including stress test results into 14 banks that are due after European markets close.

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The Moody's rating agency is also expected to pronounce on its view on Spain's creditworthiness. There are concerns in the markets that Moody's will downgrade Spain's government debt to junk status.

Craig Erlam, markets analyst at Alpari, said a downgrade to junk status could "create some panic" among holders of Spanish debt that could prompt a sell off and force yields higher.

"The positive side to this is this could accelerate the bailout request," Erlam said. Eurozone countries and the European Central Bank are prepared to help Spain financially, should it need it, but Madrid has so far put off a request.

By midday in Europe, shares were mixed, with Madrid's IBEX index underperforming its peers.

The IBEX was trading 1.1 percent lower at 7,756. Germany's DAX was 0.2 percent lower at 7,275 while the CAC-40 in France fell 0.5 percent to 3,421. The FTSE 100 index of leading British shares was one of the stronger performing indexes, trading 0.1 percent higher at 5,785.

Wall Street was posed for a slightly lower open, too, with both Dow futures and the S&P 500 futures down 0.2 percent.

On Thursday, the Spanish government said it planned to cut overall spending by (euro) 40 billion ($51 billion) in 2013, a move that won a generally-positive response in financial markets. Many investors think the cuts will lay the ground for Spain, the fourth largest economy in the eurozone, to seek financial help from fellow countries in the bloc and the European Central Bank.

Earlier this month, the ECB announced a new bond-buying plan largely designed to keep a lid on Spain's borrowing costs. However, Spain would first have to ask for financial aid from fellow eurozone countries.

Spanish Prime Minister Mariano Rajoy has balked at doing so, partly because it could require new austerity cuts. The hope is that the new budget measures are enough to stem any further requirements in the event of a request for help.

"Yesterday's news was clearly a move to forestall the kind of punitive measures we saw imposed on Greece and others," said Chris Beauchamp, market analyst at IG.

Other financial markets were fairly subdued, with the euro up 0.2 percent at $1.2936 and a barrel of oil up 38 cents at $92.23.

Earlier in Asia, stocks had been buoyed by speculation that China's central bank will act soon to help the world's No. 2 economy.

Hong Kong's Hang Seng Index rose 0.4 percent to 20,840.38. South Korea's Kospi added nearly 0.4 percent to 1,996.21. But Japan's Nikkei 225 index lost 0.9 percent to 8,870.16, sinking on a government report that showed industrial production fell a further 1.3 percent in August.

Mainland Chinese shares rose ahead of an extended holiday next week. The Shanghai Composite Index gained 1.5 percent to 2,086.17 and the Shenzhen Composite Index rose 1.9 percent to 853.83.

Benchmark oil for November delivery was up 41 cents to $92.26 per barrel in electronic trading on the New York Mercantile Exchange. The contract rose $1.87 to finish at $91.85 on the Nymex on Thursday.

In currencies, the euro rose to $1.2934 from $1.2917 late Thursday in New York. The dollar fell to 77.59 yen from 77.62 yen.

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