Markets tumble after top ECB official resigns

THE RESIGNATION of Germany’s most experienced member from the ECB’s executive board sent global markets sharply lower yesterday, as fears rise that efforts to aid Greece and other struggling continental economies may unravel.

Markets were already struggling for impetus after a lacklustre response to US jobs package proposal announced overnight by President Barack Obama.

The FTSE All-World equity index was down 3 per cent following a 2.5 per cent drop in the FTSE Eurofirst 300 index, as markets in Germany, Austria, Italy and Spain see falls of more than 6 per cent.

The resignation of European Central Bank board member Juergen Stark has created a fresh wave of uncertainty about the management of the bloc’s monetary policy. It was paired with reports that Germany was preparing a plan to recapitalise its banks in the event of a Greek default.

“The market reaction says everything about dry wood and how vulnerable global confidence is,” said Eric Fine, fixed-income portfolio manager at Van Eck Global. “It’s a dramatic move by a very credible person who represents Germany. It just looks bad.”

In Dublin, shares on the Iseq fell back 3.17 per cent despite a strong performance by oil explorer Tullow on the back of a new find.

In London, the FTSE 100 gave up 2.35 per cent while continental European markets were worse, with Germany’s DAX, Italy’s Mibtel and Spain’s Ibex indices all sliding more than 4 per cent and the Paris CAC down 3.6 per cent.

Meanwhile, Wall Street’s SP 500 is down 2.8 per cent – a midday free-fall halted at the key 1,150 level. Traders were beset by the European fears as well as a generally lacklustre response to Mr Obama’s jobs package and a heightened terror attack threat level on the eve of the decade anniversary of the September 11th, 2001, attacks.

A lack of detail in President Obama’s $450 billion jobs creation plan and early evidence that the Republican caucus will be obstructive appear to be of concern to many traders. It followed Ben Bernanke’s unwillingness to spell out the options available to the Federal Reserve in a speech on Thursday.

“Finding $2,000 billion in cuts in an election year will be extremely difficult and should increase fiscal risk premiums,” said Priya Misra, head of US rates research at Bank of America Merrill Lynch.

Cynics are not pricing in any faith that euro zone default worries will be adequately addressed at this weekend’s G7 meeting in Marseille. Greek 5-year credit default swaps have risen more than 10 per cent to breach 3,000 basis points for the first time is a clear sign some form of default is expected, with stresses added by ongoing debt swap negotiations.

The euro fell 1.6 per cent to a six-month low of $1.3656, with many technical analysts believing the single currency is looking vulnerable to further losses. – (Copyright The Financial Times Ltd 2010)