Eurozone concerns weigh on global equities, euro
LONDON — Shares fell around the world on Wednesday and the European single currency hit a two-week low as popular opposition within the eurozone to austerity measures unnerved investors already worried about a weak global growth outlook.
The main focus was on Spain: protesters clashed with police on Tuesday as Madrid prepared to unveil its 2013 budget on Thursday; and the Catalonian government, which oversees the country’s biggest regional economy, called a snap election that could jeopardise plans for economic reforms.
A general strike in Greece and signs of dissent among key eurozone officials over new policies to tackle the region’s debt crisis were also combining to take the gloss off recent moves by the European Central Bank (ECB) to calm markets.
"Once again, it shows that when the ball is back in the governments’ court, I think there’s all this room for disappointment," said Tobias Blattner, European economist for Daiwa Capital Markets. "I think we just see that the governments are not living up to expectations, are not implementing what they promised."
The renewed concern about the eurozone’s ability to tackle its financial crisis has sparked a sharp rise in volatility on equity markets, leading to the worst day since June for the S&P 500 index on Tuesday and subsequent falls across Asia.
As a result the MSCI world equity index was down 0.7% at 332.70 points on Wednesday and had retraced all the gains made after the US Federal Reserve announced a new round of aggressive monetary easing last week.
Adding to the negative sentiment, Philadelphia Federal Reserve president Charles Plosser said on Tuesday that the Fed’s latest stimulus measures would not do much to boost economic growth or lower unemployment and raised the risk of longer-run inflation.
In Europe, the main blue-chip STOXX 50 index was down 1.78%, its biggest one-day fall since early August, led by declines in Spanish and Italian markets, which were more than 2% lower.
The FTSEurofirst 300 had shed 1.1% to 1,107.42 points, having risen 0.4% on Tuesday. It is still up more than 8% for the September quarter.
The growing problems facing Spain, made worse by uncertainty over when the government might request an international bail-out, pushed the euro down 0.4% to $1.2848, its lowest level since September 12.
"The Spanish story does seem to be deteriorating. We are seeing Spanish bond yields pushing higher this morning and that’s being echoed by a slightly lower euro," said Daragh Maher, currency strategist at HSBC.
Spain’s benchmark 10-year bond yields rose 23 basis points to 6%, while the cost of insuring the debt against a default has also risen sharply.
Spain faces a big week with not only next year’s national budget set to be unveiled; also due for release are plans for new structural reforms for the economy and the results of stress tests on the Spanish banking sector.
Madrid faces a difficult task in reducing its budget gap in an economy which the central bank said on Wednesday is still contracting at a "significant rate".
Economically important Catalonia’s decision to hold early elections only added the pressure on Spanish Prime Minister Mariano Rajoy, who conceded in an interview with the Wall Street Journal that he would ask for a bail-out if the country’s borrowing costs remained too high for too long.
"Ahead of these elections, we will have that classical political paralysis. So I think the government in Catalonia will probably not try its hardest to meet the targets," Daiwa’s Mr Blattner said of goals set for reducing public deficits. "All the targets for the year as a whole for Spain I think are now under threat."
Italian Prime Minister Mario Monti’s statement on Tuesday, confirming he would not run in an election due next year, added to the weakness spilling over from Spain into its bond markets. Italian 10-year bond yields were up nine basis points at 5.2%.
Commodities markets remain focused on the health of the global economy and signs that slowing growth may be putting a brake on demand.
Brent crude oil futures were down 67c to $109.75 a barrel, their second drop in three days, and US crude declined 72c to $90.65 a barrel.
Three-month copper on the London Metal Exchange was down 0.8% at $8,210.50 a tonne, although this followed a gain of more than 1% on Tuesday.
"With worries about Europe and Spain in focus this week, and lingering anxiety over China’s economic growth, we see the risk of gains in the third quarter turning out to be a false dawn," said ANZ Bank’s metals analyst Nicholas Trevethan.
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