EURO CRISIS:EUROPEAN STOCK markets suffered the sharpest fall in five weeks yesterday as fragile investor confidence was shattered by Greece's surprise move to hold a referendum on its latest bailout deal.
Italy’s borrowing costs were pushed higher as fears spread that the Italian opposition might follow Greece’s example and call for a referendum on the country’s austerity plans. Heavy selling was evident across all sectors but financial stocks bore the brunt of yesterday’s losses, with one Dublin broker describing the session as an “absolute horror show” for major European banks. Société Générale plunged 16 per cent at one point.
National benchmark indexes tumbled at least 2 per cent in all 16 western European markets open yesterday, except Iceland. Italy’s FTSE MIB Index led the sell-off, plunging 6.8 per cent. France’s CAC 40 Index dropped 5.4 per cent, Germany’s DAX Index lost 5 per cent and the Iseq index finished more than 4 per cent lower.
By the close of the session, European shares had given back a hefty slice of October’s gain and had recorded their biggest one-day loss in over a month.
The news of Greece’s referendum plans, announced late on Monday, provoked the ire of euro zone peers, domestic politicians and market participants ahead of a meeting of G20 leaders which starts tomorrow, and dragged stocks right back into the broad trading range established in August and September.
European markets had rallied almost 8 per cent in October on hopes for a euro zone debt deal, which arrived last week but with much detail – particularly around funding – missing.
The euro weakened for a third day against the dollar, touching the lowest point in almost three weeks, as concern the region’s rescue plan will crumble and the European Central Bank will cut interest rates damped demand.
The Greek referendum “introduces a degree of unpredictability and risk” that was difficult to quantify, said Andreas Utermann, global chief investment officer at RCM. While a Yes vote cannot be excluded, “we are braced for very difficult times and the only equity theme that we continue to feel confident about is strong, quality franchises with the prospect of dividends”, he said.
Volatility across asset classes would likely increase and the threat of a domino effect on other peripheral euro zone nations was real, Mr Utermann added.
Illustrating that point, Italian and Spanish bond yields rose, their spread to German bunds widening as traders factored in increased contagion risk.
A fresh slowdown in global factory output also weighed on equity market sentiment, raising fears of a return to recession in Europe and weighing on cyclicals, even though a smattering of other corporate news provided some relief. – (Additional reporting Bloomberg/ Reuters)