Worries over the euro zone debt crisis and the region's banks hit global stocks and boosted the dollar today after Italian lender UniCredit priced a rights issue at a huge discount and a German bond auction failed to impress.
US stocks fell after a sharp rally in the previous session as investors set their sights again on Europe's debt problems. US investors began the new year pushing shares higher, with the broad S&P 500 index rising to its highest level
since late October. The first trading day of the year often brings a lot of money into the markets.
Financial stocks were the top decliners in early trading after European banks dropped on concerns a tight credit market will make it expensive for them to raise capital and for euro-zone countries to refinance debt.
The S&P financial sector index lost 1 per cent, the biggest loser among S&P sectors. Bank of America Corp
was the top decliner on the Dow, falling 2.1 per cent to $5.68.
Banking sector fears were ignited by news UniCredit had launched a €7.5 billion two-for-one rights issue at a discount of 69 per cent to its closing share price yesterday.
The capital increase, meant to shore up its ravaged balance sheet, sent shares in Italy's largest bank by assets down 8.5 per cent.
The FTSEurofirst 300 index of top European shares was down 0.6 per cent at 1021.70 points after hitting a five-month high yesterday, when strong manufacturing data from the United States and China helped boost risk appetite.
The Stoxx Europe 600 Banking euro zone index, which has many constituents exposed to the euro zone debt crisis, fell 2.9 per cent.
"Whatever way you slice and dice it, UniCredit's discount is much bigger than for the other banks and that being the case, I think it's come as a bit of a shock to some investors, and I think some of them are just bailing out," said Andrew Lim, banks analyst at Espirito Santo.
The MSCI world equity index edged down 0.2 per cent after starting the session firmer in line with rises in Asian stock markets.
Germany sold €4.057 billion of 10-year government bonds in its first auction of the benchmark maturity since one last November that raised fears Europe's debt crisis had begun to threaten its biggest economy.
Bids for the Bunds amounted to 1.3 times the amount offered and were improvement over the previous sale - one the country's least successful debt since the introduction of the euro.
The debt sold at an average yield of 1.93 per cent, lower than the 1.98 pe rcent from November.
"It looks solid - there's nothing surprising. (The bid/cover ratio) was above one, which the market will see as a decent start for the year," said Achilleas Georgolopoulos, a strategist at Lloyds Bank in London.
The sale was "much better than November's auction, but not particularly great either," added Peter Chatwell, rate strategist at Credit Agricole.
The auction kicked off a huge sovereign refinancing cycle in the euro zone, with traders worried that debt-laden countries such as Italy and Spain may have to pay unsustainably high prices to meet their needs.
The single currency slipped 0.8 per cent to $1.2950 and within striking distance of its 2011 trough of $1.2858, hit in the last week of December.
The falls came after a sharp rally yesterday in the wake of a better-than-expected US manufacturing report that saw the single currency reach its highest in a week at $1.3077.
In another sign of stress among euro zone banks, commercial lenders' overnight deposits at the European Central Bank hit a record high of €453 billion, data showed today.
However, key euro zone bank-to-bank lending rates continued to drop, pulled down by the ECB's recent record injection of almost half a trillion euro of ultra-long and ultra-cheap three-year liquidity.
Euro zone banks received €489 billions late last month in the first of two opportunities to access the long-term loans.
The latest set of purchasing managers' indexes (PMIs) for the euro zone and several key individual countries suggested the region remains on track for a moderate recession despite a slight uptick in the data for December.
The slight PMI improvement was due mainly to an upturn in Germany, widening the divisions between the region's stronger economies and the likes of Italy and Spain that appear to be undergoing a severe contraction.
Euro zone inflation eased from last year's peaks of 3.0 per cent in December, creating room for more ECB interest rate cuts to help the weakening economy.
Reuters
