European Markets Rattled

by on September 26, 2012 2:05 pm BST

European stocks sank, the euro weakened and the borrowing costs of fiscally stressed euro-zone countries rose in bond markets on increasing signs that the currency bloc’s latest plans for resolving its debt crisis are unraveling.

By midday Wednesday, Spain’s IBEX index was down more than 3%, making it Europe’s worst performer. The benchmark Stoxx 600 index had dropped 1.4%. The U.K.’s FTSE 100 Index fell 1.2%, Germany’s DAX lost 1.6% and France’s CAC-40 was 2% lower.

Losses in financially strained parts of Europe were more severe. Italy’s FTSE Mib was down 2.7% and Greece’s ASE Composite index was up 0.4%.

The euro depreciated to $1.2863 from $1.2896 late Tuesday in New York, having fallen to $1.2850 earlier, it lowest level since Sept. 12. The dollar was at ¥77.67 from ¥77.80.

Financial markets were no closer to knowing when Spain might request a bailout as Spanish Prime Minister Mariano Rajoy told The Wall Street Journal that he would need to determine whether the conditions attached to a financial rescue were “reasonable” before asking for help.

Pressure continued to mount on Spain to seek financial assistance in the face of rising borrowing costs, while the Bank of Spain said economic activity continued to fall in the third quarter. This ups the ante on the Spanish government to find ways to meet its stringent budget-deficit targets.

The yield on Spain’s 10-year government bond was up 0.27 percentage point on the day at 5.99%. The yield on Italian debt of the same maturity rose 0.07 percentage point to 5.16%.

Also helping to push Spanish and Italian government bonds yields higher was a statement from the finance ministers of Germany, the Netherlands and Finland calling into question the use of euro-zone bailout funds to recapitalize banks directly.

Meanwhile, Germany’s central bank President Jens Weidmann told the Swiss daily Neue Zuercher Zeitung that he and others were beginning to doubt the wisdom of the European Central Bank’s bond-purchasing plans. Fitch, the credit-rating company, called the proposal positive.

El País newspaper reported that Catalonia may call early elections after the Spanish central government ruled out the possibility of a new financing pact for the region.

As nervousness around the euro zone ratcheted higher, German sovereign debt was in demand. The December Bund contract rose 93 ticks to 140.99.

Germany tried to sell €5 billion ($6.47 billion) of its 10-year benchmark bond at an auction on Wednesday, but received bids of only €3.951 billion. The yield at the debt sale was the highest at a 10-year auction since June.

Banks in the region were under the most pressure, with Intesa Sanpaolo,


and BNP Paribas

leading declines.

The Stoxx Europe 600 autos index slid 2.6%, while the corresponding indexes for banks and basic resources dropped 3.1 and 1.8%, respectively.

European Central Bank executive board member Jörg Asmussen told German daily Die Welt that the bank won’t take part in a potential restructuring of Greek debt. Trade unions in Greece embarked on a general strike Wednesday in protest over austerity measures, as the government prepares to present its budget-cutting plans to euro-zone officials at the end of the week.

In the U.S., the efficacy of the Federal Reserve’s recent bond-buying plan was called into question, with Federal Reserve Bank of Philadelphia President Charles Plosser saying Tuesday that the central bank’s recent move is unlikely to boost economic growth.

On the economic calendar, U.S. new home sales data are at 1000 ET. Ahead of the open of U.S. markets, the Dow Jones Industrial Average front month futures contract was down 0.1%, while the S&P 500 front month futures contract was also 0.1% lower.

November Nymex crude oil futures were down $0.71 at $90.66 a barrel and the November Brent oil contract was down $1.17 at $109.28. Spot gold was up $3.50 at $1,763.90 a troy ounce.