By Michele Maatouk & Andrea Tryphonides
European stocks were in the black and the euro made strong gains against the dollar Tuesday, supported by a well-received Spanish debt auction, as market participants said they continue to expect the European Central Bank will step in to intervene in markets to help fiscally frail euro-zone countries.
This is despite the central bank's comments Monday, when it poured cold water on suggestions that it is preparing to set a cap on euro-zone government bond yields.
"The fact is that we and the market expect the ECB to intervene in the secondary market, whenever there is a Spanish request for assistance," said Lloyds Bank Wholesale Banking & Markets.
Spain is seen to eventually ask for financial aid, which could go some way to easing tensions in the euro zone. Over the weekend, Spain's Minister of Economy Luis de Guindo said that if the ECB provided "full support in the secondary market," the government would consider requesting international support.
Commenting on reports about the possibility of ECB intervention, Bank of New York Mellon said, "In the absence of genuine fiscal union [involving joint liability/joint control], the simplest solution remains the idea of a program of quantitative easing by the ECB allied to an implicit commitment to consistently set policy rather more towards the needs of the periphery rather than the core over time." It added: "Although this is not what the ECB would be promising were it to commit to keeping spreads below certain thresholds...it would certainly be a step in the right direction."
Meanwhile, there are some top meetings this week between European leaders which investors are eagerly awaiting. German Chancellor Angela Merkel will meet French President Francois Hollande on Aug. 23, while Greek Prime Minister Antonis Samaras will visit Berlin and Paris later this week. Mr. Samaras is expected to try and push through a deal to reduce some of the austerity pain in Greece, though it remains to be seen whether European partners will bend to his will.
"With Greece remaining in the spotlight and ECB speculation lingering, the modest current risk-on is bound to continue," concluded Lloyds.
Also helping to underpin the tone Tuesday was a relatively well-received Spanish bill auction, in which the Treasury sold 4.515 billion euros ($5.569 billion) of 12- and 18-month bills, slightly more than planned and at lower yields than the previous auction.
At 0940 GMT, Spain and Italy's 10-year government bond yields were a little lower. Spain's bond yielded 6.21%, down six basis points while Italy's 10-year government bond yield was at 5.70%, down seven basis points.
In equity markets, the benchmark Stoxx 600 index was up 0.4% at 272.57. The Stoxx 600 basic resources index was up 1.5% and Stoxx 600 banks index was 0.9% higher, helped by improved market sentiment toward risk.
Cheuvreux said in a note Tuesday that evidence is accumulating to support the argument that the chronic underperformance of higher risk, lower-valued stocks, has come to an end. As a result, it upgraded diversified financials to neutral from underweight, and capital goods to overweight from underweight. It downgraded European food beverage & tobacco, and healthcare equipment & services to neutral from overweight. The U.K.'s FTSE 100 was up 0.3% at 5843.56, Germany's DAX was up 0.5% at 7065.98 and France's CAC 40 was 0.7% higher at 3505.89.
Outside of European core, Spain's IBEX 35 was up 0.4% at 7497.40 and Italy's FTSE MIB was up 1.2% at 15,157.08, while Greece's ASE Composite was 1.4% higher at 635.27.
In corporate earnings news, commodities giant Glencore International reported a 17% year-on-year rise in revenue to $108.96 billion for the first half of 2012, but a 24% drop in earnings before interest, taxes and exceptional items to $2.51 billion due to lower commodity prices. The result, however, beat analysts' expectations. In addition, Glencore's Chief Executive Ivan Glasenberg told Dow Jones Newswires that the company is willing to walk away from its proposed merger of equals with Xstrata PLC as disputes continue with Xstrata's largest shareholders about the value for the deal. "It's not a must-do deal," Mr. Glasenberg told Dow Jones Newswires in a call. "If we don't do it now, we can do it in the future," he added. Glencore shares were trading flat, while Xstrata was off 0.1%.
On foreign exchange markets, the euro remained solid versus the dollar, hitting two week highs. "At present, euro/U.S. dollar direction remains dominated by investor expectations regarding the ECB and European politicians," said Credit Agricole Corporate & Investment Bank. "Given this skewed sensitivity, even the expectation of ECB policy delivery in the next few weeks should be sufficient to keep the euro buoyant into early September."
At 0940 GMT the euro was at $1.2408 against $1.2346 late in New York, Monday. The dollar was at Y79.40 against Y79.42.
In other asset classes, the October Nymex crude oil contract was up $0.58 at $96.84 a barrel while October Brent was up $0.79 at $114.49. Spot gold was up $2.90 at $1,624.40 per ounce. The September Bund contract was at 141.61, down 0.39.
Write to Michele Maatouk at michele.maatouk@dowjones.com
