EUPHORIA one day, despair the next; so much for the relief rally triggered by the €100 billion (S$160 billion) rescue of Spain's wobbling banks.

 

Cynical investors quickly saw the flaws in the much-heralded rescue and sold up.

 

Wall Street had tanked overnight on worries over the way the deal is being structured. It was also concerned about the heavier debt burden Spain must shoulder due to the bailout.

 

The sour sentiment then hit many Asian bourses, sending them into the red yesterday after registering their biggest one-day gain in five months on Monday.

 

Tokyo was down 1.02 per cent, Shanghai lost 0.7 per cent and Hong Kong fell 0.43 per cent, but the benchmark Straits Times Index bucked the trend and reversed early losses of up to 27.55 points to end up 9.27 points at 2,797.08.

 

'The bubble burst in dramatic fashion overnight when global markets realised the Spanish banking bailout was merely a short- term fix and that the Spanish economy may be next in line for a bailout,' said Mr Avis Wang, IG Markets' premium client manager.

 

That the share rally triggered by the Spanish rescue turned out to be a one-day wonder took analysts by surprise, given the positive initial reaction to the deal.

 

There is a fear now that ever larger doses of monetary fixes may be needed just to keep the single currency zone from falling apart.

 

Bank of America Merrill Lynch chief global equity strategist Michael Hartnett noted yesterday that investor optimism has collapsed back to the lows experienced late last year.

 

The bank noted that investors have taken so much money out of emerging markets recently that all the gains made by equities this year have been wiped out.

 

'Unsurprisingly, the June fund manager showed us that global investors had slashed their exposure to emerging market equities to the lowest level since October 2011.'

 

However, Mr Hartnett remains hopeful of a 'big bang policy response' to the European debt crisis that may potentially spark a massive stock market rally.

 

But Mr Eric Fishwick, CLSA's head of economic research, observed in a report that just as Asia discovered there was no easy way out of its debt crisis in 1997, there is 'no quick fix' available for Europe either.

 

'In making the adjustment, people will lose their jobs. Many will lose their life savings or be made homeless,' he said.

 

'Contagion will be worse and take longer than you think,' he warned, noting that the most intense pressure on the Hong Kong dollar during the Asian crisis occurred more than a year after the huge devaluation of the Thai baht in July 1997.

 

Research houses in Singapore expect the STI bounce to be short-lived as hopes dwindle for a swift solution to Europe's debt problem.

 

'Beyond this short-term rebound, STI should resume its correction trend... down towards the 2,540 support,' said DBS Vickers.