European stocks inch up ahead of Greek election

European shares edged up and the euro was flat on Wednesday as worries over contagion from Spain’s banking sector were heightened by a sharp rise in the country’s borrowing costs.

Riskier assets have fluctuated all week as optimism and disappointment have alternately gripped financial markets, reflecting a high level of unease over whether Spain’s banking crisis can be contained and if Greece will remain in the euro zone after its 17 June election.

“The focal point for market anxiety is the absence of a sufficiently robust firewall to shore up Spain and Italy in the event that Greece leaves the eurozone,” said Nicholas Spiro, Managing Director at Spiro Sovereign Strategy, a consultancy firm which analyses sovereign risks.

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The uncertain outlook for Europe is expected to drive demand at a 10-year, 5 billion euro bond sale by safe haven Germany later on Wednesday, even though equivalent bonds in the secondary market offer an extremely low 1.47 percent.

In equity markets a choppy trading session in Asia earlier left the Morgan Stanley Capital International (MSCI) world equity index up 1.4 percent at 301.82 points for a gain of over 3.5 percent from last week’s lows for the year.

The FTSE Eurofirst 300 index of top European shares rose 0.2 percent to 992.29 points, having risen 0.7 percent on Tuesday, although overriding nervousness in the market was highlighted by a 1.3 percent rise in the Euro STOXX Volatility index.

The euro was little changed at $1.2505, close to the middle of a range between its two-year low hit on 1 June at $1.2288 and a three-week high reached on Monday at $1.2672.

Spanish 10-year yields, which hit euro-era highs of 6.86 percent on Tuesday, traded around 6.75 percent but are expected to test the 7 percent level, viewed by many as the point at which borrowing from capital markets becomes unaffordable in the long term.

Reuters