Shares, euro jump on Spanish bank bailout

A wave of relief buying swept across financial markets on Monday after a rescue package of up to $125 billion for Spain's banking sector eased some concerns about the euro zone debt crisis. 

Spanish banks have been hit by a collapse in the real estate sector and a surge in bad loans but their stocks gained on news of the bailout and the euro and commodities also rose.  

The rally after the weekend deal between euro zone finance ministers may be short-lived, however, as investors turn their focus to Greek elections on Sunday that could put Athens on a path to leaving the currency bloc. 

That would then renew the market pressure on Spain and Italy, which is also facing scrutiny of its public finances. 

"It's a big number, much bigger than what people had been expecting. It reduces the systemic risk, so it's hard not to be buying this morning," said David Thebault, head of quantitative sales trading at Global Equities. 

"But all in all, it's a credit line, provided to one sector of the Spanish economy in a bid to stop the bleeding. We're still far away from the definitive solution here." 

Following gains across Asia overnight, European shares surged in early trade, with the Euro STOXX 50, the euro zone's leading index of blue-chip shares, up 2.4 percent, and Spain's IBEX 35 up 4.6 percent. 

Emerging market stocks were up 1.9 percent.  

"In terms of fundamentals, this is clearly an important step as the money now seems to be on the table to heal the Spanish banking sector," Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets, said. 

"However, this does not mean we have clear sailing from here. In order to get out of this situation, we need structural supply side reforms and some growth." 
  
The euro rose more than 1 percent to hit a three-week high of $1.2672 in Asian trade, pulling away from a near two-year low of $1.2288 hit earlier this month, before slipping back to trade around $1.2615.  

But economists said the package would do little to help pull the Spanish economy out of recession and bring down the highest unemployment rate in Europe. 

Spaniards were moving money abroad at the fastest rate since records began, data showed last week, ramping up pressure on the banking sector, while ratings agency Fitch downgraded the country's credit rating by three notches.    

"It is positive that politicians have reacted so quickly and ahead of the Greek elections, and this will hopefully contain the risks within the Spanish banking sector," said Niels Christensen, currency strategist at Nordea in Copenhagen. "But it is not going to boost the Spanish economy so there is still a mountain to climb to control the debt situation. 

Elsewhere, the dollar fell against a basket of currencies , while the Australian dollar rose 0.6 percent.  
  
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With demand for riskier assets strong across financial markets, yields on Spanish and Italian government debt and the cost of insuring against default all fell. 

By 0820 GMT, the yield on Spanish 10-year bonds  had dipped around 20 basis points to 6.05 percent, while Italian 10-year yields fell to around 5.64 percent. 

But the cost of insuring 5-year Spanish debt against default was only dropped a modest 24 basis points lower while Italian CDS were only 17 bps lower, a sign the rally may not last. 

"In the short-term the relief sentiment is likely to take the upper hand," said Rainer Guntermann, a strategist at Commerzbank.  

"For peripheral debt spreads we should see relief for Spain and Italy but we doubt this will be a sustainable trend in the medium to longer run as we come to the weekend we have the risk of the Greek election." 

German Bund futures were down 0.5 percent.     

With markets responding favourably to news of the bank bailout, the Spanish Treasury said it would continue to tap debt markets as planned this year.     

Among commodities, Brent crude rose more than $2 as the bank deal supported hopes that demand for oil would be steady. A breakdown in nuclear talks between Iran and the United Nations also raised concern about potential supply disruptions. 

Gold was also higher, helped by the Spanish bank deal and surprisingly strong China trade data released over the weekend, market players said..

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