European stocks closed sharply down and the euro slumped yesterday amid a warning on France’s top credit rating and an apparent failure to reach a deal on cutting the US budget deficit.
Markets shrugged off an election victory for Spain’s centre-right, with the euro sliding below $1.35 for most of the day, but later recovered on US concerns.
London’s FTSE-100 gave up 2.62 per cent to 5,222.60 points, Frankfurt’s DAX lost 3.35 per cent to 5,606.00 points and France’s CAC-40 dropped 3.41 percent to 2,894.94 points. Madrid slumped 3.48 per cent and Milan plunged 4.74 per cent. The euro was trading at $1.3520 at 1700 GMT compared to $1.3519 on Friday in New York.
US markets were also down sharply due to Congress’s apparent failure to reach a deal to cut the country’s massive budget deficit and to extend stimulus measures into next year.
Spanish government borrowing costs rose as the financial markets found no reason for confidence from a sweeping election win for a right-wing government committed to radical budget cuts so as to balance the public finances.
The yield or rate of return earned by holders of benchmark Spanish 10-year government bonds rose to 6.514 per cent in evening trading from 6.345 per cent at the close on Friday.
“Equities are not a happy place to be right now with so many uncertainties shrouding the market,” said Simon Denham, head of Capital Spreads trading group.
He added that the sell-off was being driven “by the wider concerns of the overall debt situation affecting not just Europe but the US as well.
“The foreign exchange traders are also in no mood for taking risks, so we have seen a hike in the safe havens that are the dollar and then yen,” Denham added.
The lack of a US deficit deal – a formal announcement by negotiators was expected after Wall Street closed – hit sentiment more due to the short-term stimulus measures than concern over the US credit standing.
“Market focus will now shift to the fate of the expiring payroll tax cuts and unemployment benefits,” said analysts with Barclays Capital, who said there was little risk yet to the US credit standing.
The US cost of borrowing actually eased in early bond trading, with the yield on the 10-year Treasury bond falling to 1.97 per cent from 2.01 on Friday.
Asian shares closed mostly lower yesterday as markets awaited the outcome of key China-US trade talks amid simmering tensions between the economic superpowers.
Markets also reacted to news Japan logged an unexpected trade deficit in October, while business hub Singapore predicted sharply lower economic growth next year.
In Europe, Spain’s right stormed to its biggest election victory ever on Sunday, winning over voters desperate for an end to soaring unemployment and the eurozone debt storm.
Spain’s government was the latest to fall among the eurozone’s so-called periphery nations this year after Ireland, Portugal, Greece and Italy all succumbed to a collapse of confidence in their sovereign debt.
Mariano Rajoy, leader of the conservative Popular Party, won support from voters lured by his promise to fix the economy and create jobs, even if it means more austerity.
European stocks fell sharply last week as Spain, Italy and France faced a sharp spike in borrowing costs.
A rise in the borrowing rate on French debt bonds and possibly slowing growth could meanwhile have a negative effect on France’s top AAA credit rating but not immediately, Moody’s warned yesterday. Nevertheless France successfully placed €7 billion in short-term debt yesterday, with yields mixed amid strong demand by investors.
Benchmark 10-year French bonds were yielding 3.461 per cent at 1700 GMT, from 3.457 per cent on Friday, after having risen to 3.591 per cent in the morning.
The rate of return on 10-year Italian bonds rose to 6.647 per cent from 6.631 per cent on Friday, while Germany’s 10-year bonds benefited from safe-haven buying that pushed the yield down to 1.897 per cent from 1.964 per cent.