European stock markets retreated yesterday after a successful Spanish bond sale failed to allay fears over the eurozone debt crisis, dealers said.
They said rumours of a French ratings downgrade – dismissed by government sources – rattled nerves and added to the downbeat tone after recent volatile trade as investors consolidated strong first quarter gains.
At the close, London’s FTSE 100 index was flat at 5,744.55 points, Frankfurt’s DAX 30 lost 0.90 per cent to 6,671.22 points and in Paris the CAC 40 slumped 2.05 per cent to 3,174.02 points.
Madrid’s benchmark IBEX 35 retreated below 7,000 points for the first time in three years as it lost 2.42 per cent while Milan shed 2.01 per cent.
In foreign exchange trade, the euro recovered ground lost earlier in the session to $1.3136, up from $1.3120 in New York late on Wednesday. The dollar rose to 81.54 Japanese yen from 81.23 yen.
Wall Street was edging upwards at around 1600 GMT yesterday, with the Dow Jones Industrial Average rising 0.10 per cent, the broader S&P 500 up 0.16 per cent and the tech-heavy Nasdaq adding 0.37 per cent.
Dealers said markets were affected by the rumours of an imminent ratings downgrade for France, just days ahead of a French presidential election where the country’s ability to manage its debt is a main concern.
A French government source rejected the downgrade idea while analysts were also dismissive.
“The likelihood of a French ratings downgrade is not to be taken seriously,” BNP Paribas strategist Patrick Jacq said.
“These are rumours of rumours. It is virtually impossible that a ratings agency should allow itself to downgrade France a few days before the opening round of the presidential election,” he said.
In Paris, shares in power giant EDF and bank Credit Agricole ended at record lows, unsettled by the market talk.
Spain meanwhile paid a higher borrowing rate in an auction of 10-year bonds although the country did manage to keep the rate below the psychologically important six-per cent level.
Overall, Spain’s Treasury raised a higher-than-expected €2.541 billion in the issue of two- and 10-year bonds, a Bank of Spain statement said, but the sale failed to calm nerves over the outlook.
“It is becoming increasingly apparent that overseas investors are starting to have significant misgivings about the Spanish government’s ability to fund itself outside of its own banking sector,” said Michael Hewson, senior analyst at trading group CMC Markets.
“Markets are becoming increasingly worried that in the absence of a much bigger (eurozone) firewall than the one which is currently available, Spain will find itself in a similar situation to Greece, only without the luxury of a bailout to fall back on.”
Investors were also looking ahead to a G20 meeting today that will discuss boosting the International Monetary Fund’s debt-crisis war chest to $500 billion.
“Amid growing concerns over Spanish (debt) financing, the meeting failing to agree on enough expansion of the safety net would put selling pressure on the euro,” said Masafumi Yamamoto, currency strategist at Barclays Capital.
Japan pledged $60 billion to the IMF on Wednesday, saying it was a critical part of the organisation’s bid to boost a global firewall against Europe’s debt crisis.
Sweden, Norway, Denmark and Poland are among the nations that have since pledged billions of dollars to the effort but it was unclear what figure would be settled on at the meeting.
Asian stock markets closed mixed as dealers cautiously awaited the bond auction in Spain and absorbed a report in Chinese state media that the central bank in Beijing would boost liquidity.
Tokyo slipped 0.82 per cent, Seoul fell 0.23 per cent, while Hong Kong gained 1.03 per cent.