Merkel in euro bonds blow to European markets

EUROPEAN MARKETS were knocked in late trade when German chancellor Angela Merkel underlined her opposition to the idea of jointly issued euro bonds.

Having recovered from an opening slide on the back of a Wall Street-led rally, this late dip left bourses nursing further losses after Thursday’s dramatic sell-off, and dragged the Stoxx Europe 600 Index to the lowest level in two years.

Germany’s DAX hit a 21-month low at one stage.

Brokers noted that thin summer volumes amplified investor jitters stemming from the perfect storm of a euro zone sovereign debt crisis, stalling US growth and bank funding issues.

European banks led the falls and remained under pressure throughout, with rising borrowing costs the latest problem to hit the beleaguered sector.

Persistent concern over the handling of the crisis, particularly the lack of political unity, and the region’s piecemeal short-selling ban also contributed to the sector slide, traders said.

British and German banks, not covered by a ban, were among the worst hit, with Lloyds Banking Group down 4.8 per cent and Deutsche Bank off 2.7 per cent, although other continental heavyweights such as Santander also fell.

The day’s fall was “a continuation of the same two themes: concern over the prospects for world growth and concern over the stability of the euro zone”, Alan Brown, chief investment officer at Schroders said.

“Fears of a new recession in the United States have reached dimensions which were almost unimaginable only a few weeks ago,” said analyst Rabeya Khan with Close Brothers Seydler, on German television. Other analysts blamed policymakers for opaque recession-beating strategies.

Traders were disappointed by Tuesday’s Franco-German summit that announced no new measures to tackle euro zone woes, promising instead debt-beating proposals and a financial transaction levy.

“The result-free Franco-German meeting just spurned on the insecurity,” said Patrick Franke, analyst at the Helaba bank.

Among the worst hit of regional indexes was Spains IBEX 35, down 2.1 per cent by the close, weighed by Madrid’s announcement of fresh austerity cuts, albeit with some tax measures to try and stimulate growth.

A Dublin trader noted that stocks which have large exposures to developed markets are being hit hard, as investors anticipate that such companies will struggle to deliver growth given the difficult economic environment looming. Emerging markets are relatively small and are unable “to take the slack”, he said.

Companies with high levels of debt on their balance sheets also remained out of favour on expectations of a tighter credit environment, he said.US stocks also fell, extending the fourth straight weekly slump for the Standard and Poor’s 500 Index, as the cheapest price-earnings ratios since 2009 failed to lure investors amid concern the global economy is weakening.

Meanwhile, the cost of protecting European financial debt surged to an all-time high today.

The Markit iTraxx Financial Index of credit-default swaps linked to senior debt of 25 banks and insurers increased as much as 12 basis points to 243, a record based on closing prices, according to JPMorgan.

Darkening the mood further was an opinion poll released yesterday showing just 22 per cent of Germans confident Chancellor Angela Merkel and her government could solve the euro zone debt crisis.

“The market is beginning to price in a recession,” said Michael Hewson, CMC markets analyst to Reuters. “Until we get some clear idea of how policymakers are going to deal with euro zone sovereign debt problems, it’s not going to get any better.” – (Additional reporting Bloomberg/Reuters)