Roland Jackson London
THE SPECTRE of a new euro zone crisis, driven by risks of deflation and recession, and new shocks in Greece and Spain, swept through stock and bond markets yesterday.
A new lifeline for Greek banks and a weak Spanish bond auction spotlighted deep problems in the euro zone, widely seen as the main drag on the recovery of the global economy.
Stock markets in Europe fell by 3 percent or more, and were down across the world including in the Middle East, hit by falling oil prices. The cost of borrowing for weak euro zone countries surged.
Spain failing to achieve its maximum target in a bond sale and paid higher rates, signalling an end to the benign climate that helped the euro zone recover from years of crisis.
“Any hopes that we would see a period of consolidation after [Wednesday’s stock] sell-off appear to have been firmly dashed, with traders reaching for the sell button yet again,” said TrustNet Direct analyst Tony Cross.
The European Central Bank and EU rushed to promise Greece extra help for its banks, after Greek shares plunged two days running on worries that the country could sink without help once it leaves its debt rescue programme.
Madrid’s benchmark Ibex 35 index dived 4.28 percent to 9 422.3 points after the Spanish government revealed that it fell short of target in the auction of long-term debt.
The Paris, Milan, Lisbon and Amsterdam exchanges each fell by more than 3 percent at one point, while Frankfurt and London shed more than 2 percent from Wednesday’s closing levels.
Sentiment was also rocked this week by investor concerns over the Ebola epidemic, while tumbling oil prices have weighed on the energy sector.
“This contains a hint of panicking; the global economic situation does not warrant this much of a sell-off,” said Capital Spreads dealer Jonathan Sudaria. “Add a potentially disastrous virus into the mix and the result is what we have here – pandemonium in the market place.”
Euro zone exports fell for the third month running in August, dropping 0.9 percent in the latest sign of economic weakness, official data showed.
Inflation in the euro zone dipped to 0.3 percent in September, the lowest level since the financial debt crisis in 2009, separate figures confirmed.
Economist Ben Brettell at brokerage Hargreaves Lansdown, said: “It looks increasingly likely that Germany, the bloc’s powerhouse economy, will slip back into recession, and the risk of deflation looms ever larger.”
As a result, yesterday’s euro zone consumer inflation data “assumed an unusual significance for global financial markets”, Brettell said.
Exports from the euro zone dipped 0.9 percent in August from July to e140.5 billion (R2 trillion). They fell 0.3 percent the previous month.
“This was a third successive fall in exports, which fuels concern that stuttering global growth is limiting demand for euro zone goods,” noted IHS economist Howard Archer.
Low inflation has become a central problem for the euro zone economy, with sluggish demand from households and businesses slowing price rises and stoking deflation worries.
“The very low inflation reading for September will reinforce concern that the euro zone remains on a slippery slope to deflation,” said ING economist Martin van Vliet.
World markets also plunged on Wednesday as new US data underscored the fragile state of the global economy.
The fierce sell-off continued in Asia yesterday, led by Tokyo, with investors worried that economic slowdown in China, Europe and Japan is hitting the US.
“The turmoil that hit the markets yesterday… has addressed some of the disconnect between economic fundamentals and asset prices that have been worrying many economists for some time,” said analyst Jane Foley at Rabobank.
Bond yields for euro zone periphery countries shot up in the secondary markets following the Spanish auction. The yield on Spanish 10-year bonds jumped to 2.356 percent from 2.116 percent on Wednesday.
The yield on 10-year bonds issued by Greece, which has been considering ending its bailout programme early, jumped to 8.656 percent from 7.854 percent. – Sapa-AFP