EUROPEAN MARKETS:EUROPEAN STOCK markets fell to their lowest levels in two years yesterday as investors reacted to fears the US economy could slip back into recession and that Europe's debt crisis is far from over.
In the first day of trading since Standard Poor’s downgraded US debt late on Friday, all 18 western European stock markets registered big falls in their value.
Britain’s FTSE 100 index slid 3.4 per cent, France’s CAC 40 dropped 4.7 per cent and Germany’s DAX fell 5 per cent, the biggest daily percentage drop since March 2009. The benchmark Stoxx Europe 600 fell 4.1 per cent to 228.98, its biggest drop since March 2009. This index has fallen 21 per cent from its high in February, which means it has entered a so-called “bear market”.
Mining companies, car-makers and technology companies suffered heavy falls as investors fretted that a slowdown in global demand would hit profits.
“The sell-off is mainly due to the fear that we will relapse into recession,” said Klaus Wiener, chief economist at Generali Investments, which manages €330 billion in funds. “Many investors have finally realised that the US economy will not grow at 3 per cent.
Angus Campbell, head of sales at investment firm Capital Spreads, said continued concerns over global growth were the cause of yet another mass sell-off of stocks.
“It would seem that not even call after call from analysts saying valuations are now exceptionally cheap and attractive from a buying point of view, these aren’t enough to tempt the bulls back in,” he said.
Investors moved further into safe haven investments such as gold, which rose above $1,700 an ounce for the first time.
The turmoil in European stock markets occurred despite pledges of co-ordinated action by the G7 and G20 group of leading world economies to tackle financial instability.
It also followed a decision by the European Central Bank to buy Italian and Spanish sovereign bonds in an effort to reduce both country’s cost of borrowing.
The Italian and Spanish markets initially moved higher as the ECB began buying bonds when the market opened. The Italian FTSE MIB index jumped 2.8 per cent and Spain’s Ibex 35 rose 2.6 per cent in early trading, with banking stocks showing strong gains.
Confidence evaporated though as investors reacted to wider economic concerns and fears over continued German reluctance to increase the size of the European Financial Stability Facility, which is used to support euro zone countries in financial difficulty. The Italian and Spanish markets eventually closed down 2.4 per cent.
The spread of the euro zone debt crisis to Italy and Spain in recent months is putting additional pressure on banking systems. Italian banks almost doubled their borrowing from the Bank of Italy in July and the cost of insuring the debt of some Italian banks has more than doubled since June.
