Global stock markets moved lower in choppy trade yesterday, with investors keeping a wary eye on the eurozone debt crisis as Italian, Spanish and French borrowing costs spiked worryingly higher.
Dealers said the tone was set by losses in Asia for another nervous day and although there was a welcome for positive US retail sales and inflation data, the focus soon turned back to tensions on eurozone bond markets.
They said investors overlooked robust German and French growth data to focus on whether the recent political upheaval in Italy and Greece could be settled and set the stage for a turnaround in the eurozone’s fortunes.
As Italy, Greece and Spain paid sharply higher rates to raise fresh funds, French stocks fell more than two percent in early trade, with similar losses on other markets while the euro slumped under $1.36 on worries of further debt contagion.
“Any initial temporary relief from the ongoing formation of mainly technocrat governments in Greece and Italy has again proved short-lived,” said Lee Hardman, currency economist at The Bank of Tokyo-Mitsubishi UFJ in London.
“While any new Italian technocrat government will likely improve the likelihood of more credible fiscal consolidation measures and required economic reforms being implemented, the market will need to be convinced,” he added.
As Italy’s new leader Mario Monti launched a final round of talks to form a government, the country’s 10-year cost of borrowing jumped back above the danger level of seven per cent. Meanwhile in Madrid, Spain paid sharply higher rates of more than five per cent at a €3.16 billion bond issue, amid fears that the country would join Greece and Italy in succumbing to eurozone financial instability.
The critically important gap between the rates paid by Germany and France, the two pit props holding up the eurozone, widened to a record 191 basis points or 1.91 percentage points in late afternoon trade, reflecting how investors prefer the safety of German bonds in the current climate.
The French 10-year bond yield – the rate of return earned by investors – rose sharply to 3.683 per cent but the German rate was steady at 1.782 per cent, meaning that France has to pay more than twice as much as Germany to borrow.