Stocks advance as Italy auctions bills

IT WAS back to business for virtually all global markets yesterday as market-watchers looked for signs of investor sentiment going into 2012.

An auction of Italian government debt was the main focus, with Italy’s short-term debt costs halved as a new austerity package and an injection of cheap long-term money from the European Central Bank won Rome some respite in thin year-end markets.

But analysts warned that market nerves could easily reignite and pointed to a tougher test today, when Italy will sell up to €8.5 billion of longer-term bonds, including three- and 10-year paper.

The outcome of yesterday’s provided a temporary boost to European stocks and the euro, though caution returned later in the session pushing Italian bond yields higher while the euro hit a new record low, amid concern of renewed caution in the markets with signs that European banks are reluctant to lend to each other or invest in euro zone sovereign debt, despite the ECB’s recent massive liquidity injection through a three-year refinancing operation.

European stock markets started well, boosted by the successful Italian auction, though retreated in afternoon trade. The German market in particular fell off, having started strongly.

A decline in Wall Street weighed on European stocks. The FTSEurofirst 300 index of top European shares fell 0.71 per cent to end at 983.32, after rising as much as 0.63 per cent earlier. The MSCI All-Country World index lost 1.22 per cent, increasing losses for the year so far to more than 10 per cent. The FTSE 100 Index slipped 0.1 per cent, having been closed for the two previous days.

Germany’s DAX Index lost 2 per cent, while France’s CAC 40 lost 1 per cent.

DUBLIN

In Dublin, the Iseq closed down at 0.76% per cent to finish at 2,844, in its first session since Christmas.

Traders in Dublin said trading was predictably weak, though was relatively better than may have been expected.

Elan was one of the best performers closing at €10.22, while ICG also had a good day, closing at €15.45.

As racing continued in Leopardstown, Paddy Power put in a strong performance, closing at €44.41. The stock may also have benefitted from last week’s news that the US may be softening its stance on online betting, which boosted the gaming sector generally.

Construction stocks lost ground yesterday. CRH closed down at €14.64, while Kingspan and Grafton also finished in negative territory.

There was good activity in Greencore, according to traders, though the stock did finish lower.

EURO

Elsewhere, the euro hit a fresh 11-month low against the dollar and slid to a 10-year low versus the yen amid concern about today’s debt auction. The euro lost as much as 1.1 per cent to 100.73 yen and decreased 1 per cent to $1.2937.

The euro weakened against all 16 of its major peers except for the British pound and Danish krone.

“We’re still so far from being out of the woods that even on a day of being positive, people decided that the euro should continue to fall,” said David Mann, regional head of research for the Americas at Standard Chartered in New York. “It’s quite a sharp rise in the ECB balance sheet. It’s concern about monetisation already on the way in Europe.”

The euro has depreciated 1.6 per cent this year against nine developed-nation counterparts as Europe’s debt crisis intensified, according to Bloomberg data.

OIL

Oil prices fell yesterday, after six straight higher finishes, as the euro retreated against the dollar.

A stronger dollar can pressure dollar-denominated commodities such as oil. Oil investors also remained cautious as Iranian officials continued to threaten to halt oil shipments via the Strait of Hormuz if sanctions are imposed on Tehran’s oil exports because of a dispute with the West over Iran’s nuclear programme.

BOND MARKETS

Meanwhile bond markets were boosted by the successful Italian debt auction. Italian two-year notes climbed for a third day and Spanish securities rallied.

Ten-year Italian bonds snapped a four-day drop after borrowing costs declined and demand increased at a sale of six-month bills. The nation plans to auction as much as €8.5 billion today. German and Dutch two-year yields fell to records and overnight deposits with the ECB climbed to an all-time high after the central bank lent financial institutions €489 billion at a tender on December 21st.

Italy’s two-year yield fell 11 basis points, or 0.11 percentage point, to 4.97 per cent at 3:25pm. The 2.25 per cent note due in November 2013 rose 0.195, or €1.95 per €1,000 face amount, to 95.405. The 10-year yield fell five basis points to 6.94 per cent. Spanish 10-year yields fell 21 basis points to 5.13 per cent. Two-year rates dropped 33 basis points to 3.30 per cent.