April 19, 2012 / 12:08 PM / 5 years ago

Shares, oil gain after Spanish debt sale, euro weak

A man takes a photo of displays showing market prices at the Tokyo Stock Exchange in Tokyo April 11, 2012. REUTERS/Toru Hanai

LONDON (Reuters) - Solid demand at Spain’s bond sale gave a slight boost to European share and oil prices on Thursday, but the euro eased against the dollar due to wider concerns over the government’s ability to tackle a ballooning deficit as its economy shrinks.

Stocks were set to open higher on Wall Street on the auction result though attention was expected to switch to the release of a slew of corporate earnings and economic data.

Spain’s Treasury issued the full 2.5 billion euros ($3.3 billion) of two- and 10-year bonds it planned at the auction but was forced to pay more for the longer-dated paper than at a previous sale in January, suggesting that investors were not convinced by the government’s spending cuts and reforms.

“The bigger story for Spain remains one of fiscal position and growth,” said Nick Stamenkovic, bond strategist at RIA Capital Markets.

“Until we see signs that the government is implementing the medium-term fiscal consolidation program and signs of life in the Spanish economy, investors are going to worry.”

Many investors are also concerned about the euro zone’s ability to prevent Spain’s fiscal woes from spreading to other vulnerable economies in the 17-member bloc.

They are increasingly looking to the meetings of the G20 economies and the International Monetary Fund for signs of progress on a deal to increase the amount of money available to fight the euro zone crisis.

After the auction, yields on existing Spanish and Italian government debt rose slightly. Spain’s 10-year bonds were up 2 basis points at 5.87 percent, compared with the average yield achieved at the auction of 5.743 percent.

Italian bond yields were also pulled higher as investors looked ahead to supply from Rome next week. Italian 10-year yields were 8 basis points higher at 5.57 percent.

“The market is going to remain very concerned about Spain despite this auction,” said Jane Foley, currency strategist at Rabobank. “We do suspect there could be another push higher in yields in the weeks to come.”

Meanwhile France was able to sell nearly 8 billion euros of new medium- and longer- term bonds at yields broadly comparable to similar debt in the market. It received bids for nearly three times the amount offered.

Analysts said the outcome of the French auction reflected in part efforts by Socialist candidate Francois Hollande to ease market fears about his policies if he is successful in a two-round presidential election that starts on Sunday.

“We’ve seen a bit of a concession in the past few weeks as investors fret about a shift in policy under the helm of Hollande if he gets into power,” Stamenkovic said.

MARKETS MUTED

But markets were largely muted, reflecting a sense that a major hurdle had been cleared rather than any real change in sentiment.

The euro briefly rose to $1.3166 after the debt auction results before edging back, to $1.3105. Traders said any rise in concerns over Spain were likely to trigger further falls.

German Bund futures were also slightly firmer, 23 ticks at 140.59, erasing earlier losses with one analyst citing the fact the auction was priced below the secondary market.

Fears over the euro zone returned after the second of two large liquidity injections by the European Central Bank, which added 1 trillion euros into the banking system, as the market began factoring in a slower growth outlook and worries grew over the willingness of politicians to implement austerity measures.

“Spain has supplanted Italy as a proxy for euro zone risk,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy, a London-based credit risk consultancy.

“In the past month or so, perceptions of Spain’s creditworthiness have deteriorated markedly - not because of any new information but because investors believe the Spanish economy is caught in a vicious circle.”

Global shares barely reacted to the debt sale news with the MSCI world equity index .MIWD00000PUS little changed, off 0.15 percent at 325.87, after uninspiring earnings from tech bellwethers IBM (IBM.N) and Intel (INTC.O) saw Asian stock markets end flat.

In the oil market Brent crude oil extended its gains after the Spanish auction to be up nearly 45 cents a barrel at $118.49.

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