Spanish financial markets extend rally despite weak domestic economy

Spain’s stock market enjoyed its second best session this year on Wednesday, while the country’s risk premium narrowed further despite the poor prospects for the domestic economy.

The main detonator for Wednesday’s rally was the release of figures on Chinese imports that suggested the economy of the Asian giant is well on the way to recovery. That added to the support provided at the start of this week by the announcement of a massive stimulus plan in Japan.

The domestic market was also buoyed by the maximums reached by Wall Street.

The blue-chip Ibex 35 index closed up 3.35 percent at 8,136.40 points led by the banking sector, which climbed on average around five percent. That reduced the benchmark index’s losses for the year to 0.38 percent. The rest of Europe also joined in the rally, with the Euro Stoxx 50 index up 2.56 percent.

In late trading, the spread between the yield on the benchmark 10-year government bond and the German equivalent had narrowed 14 basis points to 332. The yield on the benchmark bond fell to as low as 4.63 percent, its lowest level since October 2010, just before Ireland sought a bailout from its European partners. Spanish sovereign debt offers attractive returns in the current low-yield environment.

The European Commission on Wednesday warned that Spain’s recession could continue into 2014, contrary to the government’s forecast of a recovery of sufficient strength to start creating jobs again.