SHARES TUMBLED across world markets yesterday while Italian and Spanish bonds came under increased pressure as worries over the future of the euro continued to unsettle investors.
Stress tests for euro zone banks released on Friday failed to stem anxiety about a potential Greek sovereign debt default. Fears of the debt crisis spreading to other countries in the euro zone led to a spike in Spanish and Italian bond prices.
The euro also fell against other major currencies, while gold prices climbed to a new high.
The yield on Spanish 10-year bonds rose to 6.36 per cent in trading, one step closer to the 7 per cent mark, above which investors usually lose faith in a country.
Italy’s 10-year bond yield broke through 6 per cent, a euro-era high. Irish 10-year bond yields also climbed, heading further above 14 per cent. Two-year bond yields were 0.109 per cent higher to 23.222 per cent.
The rising cost of funds for Italy and Spain is intensifying pressure on euro zone policymakers to come up with a plan to address the debt crisis when they meet on Thursday.
Overall, European stocks lost more than 1.6 per cent, while the MSCI world equity index fell 1.3 per cent. The Iseq index shed 1.26 per cent.
A Dublin trader attributed yesterday’s sell-off across equity markets to uncertainty surrounding the “continuing problem globally with debt and what the resolution to that is going to be”. He predicted investors would remain “nervy” all the way into Thursday’s crunch meeting.
“Whenever political implications are involved, you never know what might happen. This adds to uncertainty.” He said it was difficult for investors to make major investment decisions until they had more clarity on the macro picture.
In the US, as the clock ticks towards the August 2nd deadline for an increase in the statutory $14.3 trillion borrowing limit, investors were nervous about the stalemate in Washington as well as concerned about the euro zone.
Bank stocks led Wall Street lower in early trading.
The euro was down 0.6 per cent versus the dollar and the yen at $1.4072 and ¥111.30 respectively. The safe-haven Swiss franc hit record highs against the dollar and euro.
Spot gold rose to an all-time peak above $1,600 an ounce after rising more than 3 per cent for a second straight week last week, a feat it has not achieved since February 2009.
Failure to address the potential for a Greek default, as well as persistent fears that contagion – in the form of unsustainable bond yields – could spread to Italy was set to underpin investor sentiment.
“The market is going to keep an eye on sovereign debt and especially the spreads,” said Frank Vranken, chief strategist at BNP Paribas Private Banking.
Banking analysts at Espirito Santo described last week’s stress test as “a missed opportunity to address sector – and indeed sovereign – concerns” as it failed to include €4.8 trillion of wholesale/ interbank maturities.
The omission was “crucial . . . given the structural over-reliance on wholesale funding and prospect for real economic feedback from the sovereign ‘crisis’,” they said in a note. Based on the stress test results, large-cap European banks would need €23 billion of fresh capital in the event Greece, Ireland and Portugal default and “suffer real economic negative feedback loops”. – (Reuters)
