Global stock markets edged lower yesterday as concerns over European sovereign debt returned to the forefront after the eurozone’s decision on partially funding a bailout of Cyprus by taxing bank deposits.

The declines gave US equities investors the opportunity to lock in profits after an extended rally last week, but losses were limited as buyers came in after early selling. Financial shares were among the biggest losers.

The Cyprus move hit confidence in the European banking sector, sparking concerns that authorities might go after depositors in other eurozone nations. The euro and bonds of troubled European sovereign debtors also fell.

The bloc struck a deal on Saturday to give Cyprus rescue loans worth €10 billion, but defied warnings – including from the European Central Bank – and imposed a levy that would cost those with cash in the island’s banks between 6.75 and 9.9 per cent of their money. Cyprus’s Parliament put off a vote on the measure, which has shaken depositors’ confidence in banks across the continent, until today. With public anger at the deal widespread, the government said it was looking to reduce the losses for small savers.

“The issue ultimately for investors is: ‘Is this going to cause contagion?’,” said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey. European officials “have got to make clear this is Cyprus-specific and contain the risk.

“The deal staved off a default, which would have undermined the promise that last year’s Greek debt write-down was a one-time event. But the move to hit depositors takes the eurozone crisis into unprecedented territory.”

The initial response of investors was unambiguous. European shares followed Asian indexes lower and the euro fell to a three-month low, while safe-haven assets such as gold and German and US government bonds jumped.

Italian and Spanish bond yields both rose sharply, reflecting fears about the weakness of the two eurozone economies and the size of their debt burdens.

European shares closed 0.3 per cent lower, having at one point been down as much as 1.4 per cent. London’s FTSE 100, Frankfurt’s DAX and Paris’s CAC-40 were down 0.5 per cent, 0.4 per cent and 0.5 per cent respectively, leaving MSCI’s global share index down 0.8 per cent.

In the United States, the Dow Jones industrial average was down 6.80 points, or 0.05 per cent, at 14,507.31. The Standard & Poor’s 500 Index was down 3.16 points, or 0.20 per cent, at 1,557.54. The Nasdaq Composite Index was down 2.11 points, or 0.06 per cent, at 3,246.96.

Financial shares were among the weakest, with the S&P financial index down 0.6 per cent, while eurozone bank shares lost 2.6 per cent.

The euro staged a slight recovery after dropping to a three-month low of $1.2882 in Asian trading. It was down one per cent overall on the day but was flat for the European session at $1.2950.

The dollar, which investors often seek when tensions in Europe rise, gained 0.5 per cent against a basket of currencies.

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