European shares are struggling to hold onto weekly gains as traders close out a hectic week that has reignited concerns of another crisis in the region's debt markets.
The broadest measure of blue-chip European share price performance the FTSE Eurofirst 300 is trading lower on the day but will likely hold onto a five-day advance of around 1 percent. Individual benchmark indicies, however, paint a very different picture: Germany's DAX is set to advance 1.6 percent on the week, the the UK's FTSE 100 on pace for a 1.5 percent gain. In contrast, Spain's IBEX has lost around 2.5 percent of its value this week, Italy's FTSE MIB 0.6 percent and France's CAC 40 nearly 1 percent.
The differing peformance wasn't limited to stock markets. Spain's successful sale of two and ten year bonds Thursday was largely ignored by investors in an active trading session Friday as yields rose past 6 percent for the first time this week. The move, a 30 basis point advance from yesterday's auction price, suggests deep investor scepticism in the ability of Prime Minister Mariano Rajoy to implement the €27bn in planned spending cuts needed to trim his nation's budget deficit close to the EU mandated target of 4.4 percent.
Credit default swap prices on Spanish government debt traded within touching distance of thier record high 519 basis points Friday. CDS contracts are a tool used by investors to hedge their bond holdings against default. In this case, an investor would have to pay $519,000 each year for five years to insure $10m in Spanish bonds against default.
Traders were also prepping for the first round of voting in France's Presidential elections this weekend, where Socialist Party leader Francois Hollande leads incumbent Nicolas Sarkozy in most polls. France's bond market was alive with speculation earlier in the week of a potential downgrade following its well-received sale of €8bn in two, three and five year bonds Thursday. Yields on its benchmark 10-year bonds spiked past 3 percent today as traders worried that a new Socialist President may not tackle the country's persistent budget deficit with the same vigour as Mr. Sarkozy.
CDS prices for Italy were also on the rise, advancing 24 basis points to 479 basis points in early Friday trading. A basis point is 0.01 percent. Benchmark 10-year yields on Italian government debt were trading at around 5.7 percent.
Benchmark bond yields in Germany are again flirting with all-time lows after an index of business sentiment in Europe's largest economy rose for the sixth consecutive month. The Munich-based Ifo's business climate index rose to 109.9 in April, up only slightly from March but hitting the highest mark since July of last year.
Ten-year bund yields fell to 1.62 percent in Friday trading while 30-year yields were within a whisper of their all-time low of 2.37 percent.
Investors in UK government bonds, known as Gilts, were busy dealing with a surprise advance in March retail sales in Europe's second-largest economy, where threats of industrial action lifted monthly petrol sales by the biggest margin on record. Even stripping away fuel sales, retail volumes were nearly triple analysts' forecasts and suggest the Bank of England may being to pull back on its asset purchase programme earlier than anticipated if the economy shows persistent signs of recovery.
Earlier this week, minutes from the Bank of England Monetary Policy Committee meeting in April showed that Adam Posen, a long standing proponent of the Bank's quantitative easing strategy, voting against increasing asset purchases for the first time in many months as he worries that inflation may not be slowing sharply enough to meet the Bank's preferred 2 percent target by the end of the year. The Office for National Statistics said this week that UK inflation advanced to 3.5 percent in the month of March.
en-year Gilt yields rose 5 basis points to 2.19 percent in Friday trading. Traders will mark down government bond prices, which move in the opposite direction to yields, in the face of accelerating inflation, as it erodes the value of future cash payments.