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European Stock Rally Stalls on Spanish Tensions -- 2nd Update

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10/04/2017 | 01:45pm CET
By Kenan Machado and Riva Gold 
   -- Hang Seng, Nikkei end at 2-year highs 
   -- Dollar, bond yields lower 
   -- Spain weighs down European stocks 

European stocks paused their longest winning streak in over two years Wednesday as tensions in Catalonia dragged down Spanish bank shares.

The Stoxx Europe 600 fell 0.3% midday after rising for nine straight sessions, the longest run since July 2015. Futures pointed to a 0.1% opening loss for the S&P 500 after it clinched a record high Tuesday, its 41st this year.

Spain's IBEX 35 index led global declines -- falling 2.6% and bringing this week's losses to 3.7% -- as investors continued to weigh the implications of escalating tensions around Catalonia. The king of Spain accused Catalan leaders of pushing the country toward a constitutional crisis Tuesday, with the region's officials pledging to declare independence within days.

Shares of Catalonia's largest banks, Banco de Sabadell and CaixaBank, fell 5.5% and 6.2%, respectively Wednesday, while Banco Santander fell 2.9%. The three banks have, however, significantly outpaced the average European stock in gains so far this year.

Moody's Investors Service this week warned the escalating conflict over independence could have negative credit implications for Spain because it complicates the legislative process. Yields on 10-year Spanish government bonds rose to 1.745% from 1.714% Tuesday, bucking a global trend of declines.

"Catalonia is such an integral part of the overall economy," said Patrick O'Donnell, senior investment manager at Aberdeen Standard Investments. Still, he doesn't see an immediate spillover to other assets across Europe because the situation doesn't pose an existential threat to the eurozone.

Companies making up the Stoxx Europe 600 index generate just 3.5% of their revenues from Spain, according to FactSet.

Yields on Italian debt have also climbed relative to Germany's ultrasafe debt this week and Italy's FTSE MIB Index fell 1.5% Wednesday, although many investors say that may have more to do with investor concerns about Italy's own political situation.

"What's happening in Spain is a little worrying [...] but I don't think it's going to be a strain on the country's economy in terms of debt leverage, and Italian elections coming up will be more important for Europe," said Patrick Spencer, vice chairman of equities at Robert W. Baird & Co.

The euro was up 0.3% against the dollar Wednesday at $1.1759 despite the political uncertainty and data showing a fall in eurozone retail sales.

Earlier, stocks climbed in Asia after upbeat car-sales data and rising airline stocks propelled U.S. benchmarks to new records.

Hong Kong's Hang Seng Index rose 0.7% to its highest close since April 2015. China's central bank gave Hong Kong stocks a boost with its announcement Saturday that it would free up more long-term funds in January for banks to lend to small and private businesses. That is expected to help small businesses withstand Beijing's effort to lessen overall leverage in China's economy.

But this action by the People's Bank of China could also stoke worries about China's economy, said Ivan Li, a market strategist at DBS Vickers in Hong Kong.

"I think this speculation has some ground," he added, also noting that talk could ultimately spur profit-taking in Hong Kong stocks.

Markets in China, South Korea and Taiwan markets were closed, crimping overall liquidity.

In Australia the S&P ASX 200 fell 0.9%, putting it back into negative territory for 2017. Australia's big banks, miners and oil companies were off more than 1%.

Japan's Nikkei Stock Average rose 0.1% -- ending at its highest since August 2015 -- despite a rebound in the yen.

The WSJ Dollar Index, which tracks the dollar against a basket of 16 currencies, was down 0.3%, with many currency investors speculating on the next chair of the Federal Reserve following media reports of a short list of recommended candidates.

Yields on 10-year Treasury notes fell to 2.304% Wednesday from 2.332% and German bund yields fell to 0.417% from 0.462%. Yields move inversely to prices.

Write to Kenan Machado at [email protected] and Riva Gold at [email protected]

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