The European Commission said in a set of reports Wednesday that the euro area's permanent rescue fund might be given permission to directly recapitalize the currency union's ailing banks and also called for the creation of a banking supervision union to match the 17-country currency union.
The proposals came as concerns about Spain's banking sector intensified. Earlier Wednesday, the European Central Bank denied press reports released during Tuesday's session that the central bank rejected a Spanish government plan to recapitalize troubled lender Bankia. Shares in the troubled Spanish lender were down 0.5%, but off the lows of the day following the ECB's statement and the European Union reports.
Traders however said the market lacks faith in prompt action to help Bankia and the wider Spanish economy. "The botched rescue of Bankia is fanning concerns over Spain's creditworthiness at a particularly inauspicious time for the euro zone," said Nicholas Spiro, managing director at Spiro Sovereign Strategy. "The bail-out of Bankia, in whichever way it is undertaken, raises more questions than answers and brings Spain closer to an international rescue," added Sprio.
Stock indexes and the euro however recovered some ground midday in European trade following the EU announcement on the weighing up of bank recapitalizations and the ECB's denial that it wont help Bankia. By 1138 GMT, the benchmark Stoxx Europe 600 index was down 0.6% at 242.88 versus a session low of 240.64. Regionally, all major indexes shuffled off lows. Germany's DAX was down 0.6% at 6361.45 and France's CAC-40 off 0.8% at 3060.23. the U.K.'s FTSE 100 index underperformed peers, down 1.1% at 5333.23.
In the periphery, stock indexes also pushed off lows with Greece's ASE index 3.1% lower at 511.67, Italy's FTSE MIB down 0.4% at 13,058.23 and Spain's benchmark IBEX-35 down 0.6% at 6215.40, but still trading at nine-year lows. Spanish bank stocks also moved off session lows with Banco Santander up 1.7%, while Banco Bilbao Vizcaya Argentaria dropped 1.6%. The Stoxx Europe 600 banks index recovered losses to trade up 0.1%.
The euro, though still weak against the dollar, recovered and was last seen fetching $1.2448, from $1.2503 late Tuesday in New York, after hitting a low of $1.2438, the lowest level since July 2010. Earlier, the 10-year Spanish and German yield spread was at a record wide of 515 basis points, and as investors scurried to safety, German bund yields hit a record low of 1.339%. By 1134 GMT, the German June bund contract rose 48 ticks to 144.78, after hitting a record high of 144.62.
In sovereign bonds, the 10-year Spanish government bond yield moved 21 basis points higher at 6.62%, according to Tradeweb. Italy's funding costs moved higher at Wednesday's government bond auction as investors continued to fret about Greece's membership of the euro zone and the cost of bailing out Spain's banks.
Italy sold a total of EUR5.732 billion in two government bonds, below the EUR6.25 billion upper end of the combined target range. The 10-year Italian bond yield was last seen 18 basis points higher at 6.05%."Market dealers remain extremely cautious as the next three weeks are crucial to see the future of the monetary union. Despite the attractive yield pickup for Italian bonds, dealers seem to be willing to remain on a 'wait and see' mode," said Annalisa Piazza, strategist with Newedge.
Data from the euro zone dented confidence further after the European Commission said its economic sentiment indicator for the currency area fell to 90.6 from 92.9 in April. "The deterioration of the labour market, coupled with worsening economic conditions will weigh on consumer confidence and spending going forward," added Piazza.
As if Europe's woes weren't enough to contend with, a report from Xinhua News Agency suggesting that the Chinese government will not launch anything on the scale of its 2008 stimulus added to the downbeat tone. Xinhua said that there "won't be any massive stimulus plan to achieve a high growth."
Although the government has introduced a series of measures--such as project approvals, tax approvals and special subsidies for the purchase of household appliances--the measures are "notably different" from the heavy intervention taken after the global financial crisis. Basic resources, which are heavily dependent on demand from China, took a hit on the news, and the Stoxx Europe 600 index for the sector slid 2.1%.
Commodity prices declined on the reports of China avoiding huge stimulus measures and the ongoing worries over Spain. July Nymex crude oil futures were down $1.28 at $89.48 a barrel and July Brent futures were down $1.66 at $105.02. Spot gold however pushed up from lows, last seen at $1554.90 a troy ounce, up $3.90 from New York,
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