Markets: News  

Spain, U.S. data keep Europe gains in check

A previous version of this story wrongly stated the name of the trading day. The story has been corrected.

LONDON (MarketWatch) -- A sharp rise in Spanish borrowing costs at a debt auction and disappointing U.S. data kept gains on European stock markets in check Tuesday, while Spain's banking sector struggled further after a fresh round of downgrades from Moody's Investors Service.

The Stoxx Europe 600 index (SXXP) was slightly higher around 242.84 in choppy action. On Monday, the index put in its worst performance since the beginning of June as hopes faded that European leaders can produce a credible plan to contain the region's debt crisis when they gather Thursday in Brussels for a two-day summit.

On Wall Street, stocks were also slightly higher, but trimming gains after a gauge of consumer confidence tripped for a fourth month in June.

"Markets are just picking up what is left from yesterday," said Victoria Clarke, an economist at Investec Securities. "There were various negative bits of news out yesterday, and there'll be plenty of more proposals coming ahead of the summit. But many of these are dealing with long-term issues and won't solve anything right away," she added.

Spanish banks, such as Banco Popular Español SA (POP) , off 5.9%, and Bankia SA(BKIA) 6.7% lower, attracted market attention after Moody's late Monday slashed the credit ratings of 28 institutions in Spain by one to four notches.

German utilities, on the other hand, helped lift the pan-European index as E.ON AG (EOAN) gained 3.1% after Bank of America Merrill Lynch lifted the stock's rating to buy from neutral, while RWE AG(RWE) rose 2.7% after an upgrade to neutral from underperform by the same bank.

Spain's sovereign-debt problems took center stage again, after the government sold 3.08 billion euros ($3.85 billion) of short-term debt at sharply higher borrowing costs than at debt sales last month. The yields on 3-month bills nearly tripled to 2.36%, while yields on 6-month paper almost doubled. See: Spain short-term borrowing costs jump in auction.

Yields on 10-year Spanish government bonds (10YR_ESP) rose 19 basis points to 6.79% in the secondary market, according to electronic trading platform Tradeweb. A basis point is 1/100 of a percentage point.

The IBEX 35 index (IBEX) was 1.1% lower at 6,551.90, after sliding 3.7% in Monday trades. BBVA SA (BBVA) (BBVA) dropped 1.3% and Banco Santander SA(SAN) (SAN) lost 0.9%, also following a downgrade from Moody's

Cyprus entered the Europe bailout scene late Monday as it became the fifth euro-zone member -- after Greece, Ireland, Portugal and Spain -- to ask for money from the region's rescue funds. Banks' exposure to Greek sovereign debt was cited in the Cypriot case. See: Cyprus requests European bailout.

EU summit jitters

Elsewhere, markets were jittery ahead of the European Union summit at the end of the week. Among proposals likely to be discussed is one giving the EU the power to rewrite national budgets for euro-zone members that break debt and deficit rules, according to a draft reportedly seen by the Financial Times.

"The key question is [whether] you can enforce this if you couldn't enforce the changes to budgets previously. They are talking about large fines as well, but if you have a country that's struggling financially, is a large fine what you really want?" said Investec's Clarke.

"But the final product could look very different, and it's difficult seeing this proposal making it through in its current form," she added.

Proposals for a tighter fiscal and banking union are also likely to be discussed at the meeting, although German Chancellor Angela Merkel tamped hopes Tuesday for a shared debt liability within the currency bloc, according to media reports. At a conference in Berlin, she said that joint liabilities are "economically wrong."

German surprise

On the brighter side in Europe on Tuesday, European stock markets got unexpected support from a surprise improvement in German confidence data. The preliminary GfK consumer-confidence index for July rose to 5.8 points, ahead of analysts' expectations.

"It helps a little bit, but what we need really is an improvement in the fundamental macro data from Germany," Clarke said. "Sentiment is one thing, but what matters probably more to markets right now are data on how the German economy is actually performing, and markets are more concerned about the weak PMI and ZEW data."

The German DAX 30 index (DAX) were slightly higher at 6,133.36, although car makers added pressure. BMW AG (BMW) slipped 2.6% after Citigroup cut the stock to neutral from buy, citing a challenging global auto market. Daimler AG(DAI) fell 1.4%, and Volkswagen AG(VOW) (VOW3) shed 0.8%,

In France, GDF Suez SA(GSZ) added 1.3%, after Bank of America Merrill Lynch recommended buying the stock from a prior neutral stance. The CAC 40 index (PX1) was 0.3% lower at 3,013.52.

Resource stocks lent support in the U.K. The FTSE 100 index (UKX) rose 0.1% to 5,454.11 as Rio Tinto PLC(RIO) (RIO) ticked 1% higher. Read more about London stocks.