Stocks tumble in global sell-off as bonds soar


GLOBAL STOCK markets plunged yesterday as central bank interventions in Europe and Japan failed to soothe investors’ concerns over economic growth and the euro zone debt crisis.

The European Central Bank bought government bonds for the first time since March, the Bank of Japan intervened in currency markets to halt the rise of the yen, and the Turkish central bank cut rates to an all-time low.

But investors still took fright as most major stock indices entered “correction” territory, having fallen more than 10 per cent this year. The FTSE 100 in London and Germany’s Dax-30 both fell 3.4 per cent, while the Dow Jones index of US shares closed down 4.24 per cent. The Dublin market was down 3.6 per cent.

The ECB tried to calm European bond markets by offering a funding lifeline to banks and reactivating its bond purchase programme. However, despite its efforts, Spanish and Italian bond yields continued to rise and stock markets suffered a major sell-off.

Following pressure from market participants to resurrect its Securities Markets Programme, the ECB yesterday voted to do so in a decision that was not unanimous.

Given the delay in implementing new measures agreed last month by euro zone members, which will allow the European Financial Stability Facility to intervene in secondary bond markets to control contagion, the ECB moved to purchase government debt, the first time it has done so in 18 weeks.

However, it appeared yesterday that its actions would be limited, with market sources saying the ECB was just in the market for Portuguese and Irish bonds.

When questioned at yesterday’s press conference why the ECB was not buying Spanish and Italian debt, ECB president Jean-Claude Trichet refused to comment.

However, yesterday’s interventions failed to have the desired effect. In Italy, yields on 10-year bonds surged once more, hitting 6.26 per cent, the highest since 1997, while Spanish yields on 10-year bonds rose to 6.3 per cent. Spain also announced it would cancel its next bond auction.

Fears also grew that the crisis is spreading from the peripheral countries to “core” euro zone markets such as Belgium and France.

In Ireland, the yield on Irish 10-year bonds slid back slightly on the news that the ECB was buying Irish securities as part of its Securities Markets Programme.

Mr Trichet also announced an extension of the ECB’s emergency liquidity provision measures.

Next week banks will be able to borrow as much money as they need from the ECB. It will be due for repayment in six months. This is considerably longer than the shorter-term funding usually on offer.

Davy stockbrokers chief economist Conall MacCoille said that this facility will be “helpful” for European banks, but would only have a marginal impact on Irish banks, given that they are already highly dependent on official ECB short-term funding.

It was a “bloodbath” on the stock markets, according to one Dublin broker. Across Europe and the US, markets retreated and the Iseq was no exception. Markets fell in all 18 western European markets.

In London, the FTSE 100 Index sank as Lloyds Banking Group gave up 10 per cent after posting a first-half net loss of £2.3 billion. In Frankfurt, the DAX followed suit, while in Paris, the CAC 40 fell back by 3.9 per cent.

As investors fled the stock market, money continued to flow into so-called safe-haven assets such as the Swiss franc and gold, which hit another record yesterday, at $1,681.67 an ounce, although it later fell back.

Mr Trichet also said at yesterday’s press conference that Ireland was “going in the right direction” with its austerity plan, and he downplayed the ECB’s decision to appoint an external adviser to the Irish banks in July.

“If we have an adviser it’s to have the appropriate advice, there is no additional interpretation,” he said. – (Additional reporting: FT/Bloomberg/Reuters)