Sentiment Toward Europe May Be Lifting

Successful debt offerings in Portugal and Spain this week are lifting sentiment toward Europe—temporarily, at least.


Portugal raised about 1.5 billion euros yesterday and Spain 3.9 billion euros today in auctions that were surprisingly oversubscribed. At the same time, European Central Bank President Jean-Claude Trichet reassured investors, saying the bank would continue buying government bonds to support the euro zone economy.

The Portuguese and Spanish auctions bode well for other government bond sales in the immediate future, including Italian debt offerings tomorrow and next week and additional Spanish auctions later this summer.

European stocks rallied, as did shares of the big Spanish banking concerns, Banco Santander and Banco Bilbao Vizcaya Argentaria , which were up 9 percent and 10 percent, respectively, in mid-afternoon trading on the New York Stock Exchange. Both banks had been expected to buy Spanish debt if there weren’t enough sellers in the market. Auction watchers said it wasn’t clear whether they had had to or not.

Earlier this week, some major U.S. trading firms were short the euro, based on expectations that the Portuguese and Spanish auctions would falter, according to people familiar with the matter. However, one trader who watched the Spanish auction closely says that American hedge funds appeared to have been active buyers.

“People were nervous about today’s auction,” said Raj Badiani, an economist at IHS Global Insight in London. The fact that the 3.9 billion euros raised was at the higher end of Spain’s capital-raising target and that the deal had twice as many bids as available bonds “was encouraging,” he added.

Spain will likely continue its debt offerings in the coming weeks, says Badiani, given that about 16 billion euros of debt is set to mature by the end of July.

Still, the most indebted of the major European economies—nicknamed the Club Med countries by traders and investors—are not out of the woods. Tough austerity measures for balancing national budgets could remain difficult to maintain, and skittish investors may not be as sanguine about future bond auctions, say analysts.

Amid those concerns, expectations for the euro in the coming months continue to slide; late Wednesday, Goldman Sachs lowered its three-month target level for the euro to $1.15 from $1.35. Bigger bears even think the euro could reach parity with the dollar by the end of the year—a viewpoint that, just a few months ago, was considered overly bearish by many.

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