Stocks head for worst week in months

Fri, May 18, 2012, 01:00

European stocks dropped this morning, on course for their biggest weekly sell-off since September, amid signs of slowing growth in China and after Moody's Investors Service downgraded Spanish lenders.

Back at home, the yield on the Irish 5% October 2020 bond, the longest-dated bond in issue, continued to widen this morning, surpassing 7.4 per cent on a bid basis, although it was in thin trading. So far this week, the yield on Irish bonds has increased by about 40-50 basis points, as uncertainty continues to grip the Eurozone, and analysts expect the yield to continue to widen.

After a period of stability, Irish bonds are now under-performing their European counterparts, as a “flight to quality” means that yields on German and UK bonds, continue to tighten. Indeed German government bond yields
hit record lows today and were expected to fall further amidst fears that the current uncertainty could evolve into
a euro zone financial meltdown. Yields on French and Spanish 10-year bonds are also widening, but to a lesser degree than in Ireland.

In the UK, the FTSE 100 fell to its lowest level since late November, down by 42.44 points, or 0.8 per cent, to 5,295.94 points by 10.25am. The index had closed below 5,400 points for the first time this year on Thursday, and was set to record its third consecutive week of losses.


In the US, index futures were little changed, while Asian shares retreated. BHP Billiton Ltd. and Rio Tinto Group lost 2.7 per cent and 3.5 per cent, respectively, amid signs of slowing growth in China. Banco Espirito Santo SA and Bank of Ireland both lost more than 1 per cent, as Bank of Ireland was downgraded to sell by Deustche Bank. Machinery companies fell after Caterpillar Inc. reported slowing sales.

The Stoxx 600 dropped 0.7 per cent to 240.03 at 8:38 a.m. in London, extending its weekly decline to 4.7 per cent. Futures on the Standard and Poor's 500 Index expiring in June added 0.2 per cent after the gauge slumped to a four-month low yesterday.

The MSCI Asia Pacific Index plunged 2.6 per cent today.

“Contagion fears have gripped the markets with a storm closely brewing over Europe,” said Nam Truong, a trader at Capital Spreads in London.

Almost $4 trillion has been wiped from global equity markets this month amid mounting concern Greece will have to leave the euro currency union. The country's credit rating was reduced one level by Fitch Ratings late yesterday amid concern it will not muster the political support needed to remain a member of the 17-nation euro area.

Moody's lowered debt ratings at 16 Spanish banks, citing mounting loan losses, the country's recession, restricted access to funds and the reduced ability of the government to support lenders as its own creditworthiness diminishes.

The rating company cut nine lenders by three notches, including Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA, and kept seven on review for further reductions, it said in a statement after the close of US trading yesterday. The moves follow Moody's May 14th downgrade of 26 Italian banks and its February 13th cut of Spain's sovereign-debt rating.

Nonetheless Spanish banks staged a bit of a rally, with Santander and BBVA climbing by 3 per cent to €4.58 euros and 3.5 per cent to €4.93 respectively. Espirito Santo, Portugal's biggest publicly traded bank, lost 2.9 per cent to €46.8 euro cents, while UBS AG, Switzerland's largest lender, slid 1.3 per cent to €10.81 in Zurich.

Additional reporting: Bloomberg/Reuters.