A slump in the shares of Austrian bank Erste hit the Vienna stock exchange yesterday and halted a rally on the broader European equity market which had reached multi-year highs this week.
Erste dropped 16.4 per cent after the bank, the third-biggest in emerging Europe, warned that fresh hits from Romania and Hungary would drive it to a record 2014 loss.
Erste also dragged down the shares of rival Raiffeisen and weighed on Vienna's benchmark ATX index, which fell by three per cent and underperformed other major European stock markets.
The Stoxx Europe 600 Banking Index declined 1.2 per cent, with other banks with links to eastern Europe also falling, such as Intesa and UniCredit which both weakened by 3.1-3.2 per cent.
“Austria's banking system is particularly vulnerable due to its historic ties to eastern Europe,” said HED Capital head Richard Edwards.
Edwards backed going ‘short’ to bet on more losses for the Vienna's ATX, which is one of western Europe’s smaller markets.
The ATX is down by 3.5 per cent since the start of 2014, underperforming a five per cent rise on Germany's DAX – which has hit record highs – and a six per cent advance on the pan-European FTSEurofirst 300 index.
That index, which had risen for the last three days in a row to hover near six-and-a-half-year highs, slipped by 0.3 per cent to 1,394.15 points yesterday.
The eurozone's blue-chip Euro Stoxx 50 index also retreated 0.6 per cent to 3,270.47 points.
Trading activity was thin yesterday, with the US stock market shut for the July 4 holiday.
Many traders remained optimistic that European equities would rally towards the end of 2014, helped by a backdrop of strong US jobs growth and economic stimulus measures from the European Central Bank.
They said that, for now, the falls at Erste and the Vienna market were not enough to hit larger banks and larger European equity indexes.
“The DAX and Euro STOXX are only marginally down, and I think that the broader market has a much stronger resistance nowadays to problems such as the ones we are seeing in Austria,” said Berkeley Futures associate director Richard Griffiths.