Eurozone break-up talks and expectations about tighter banking sector regulation triggered a sharp sell-off on Wall Street and European equity markets this afternoon.
The euro slid to a 19-month low against the US dollar this afternoon amid concern that the sovereign debt crisis will crimp growth and eventually lead to a breakup of the eurozone. Deutsche Bank’s Chief Executive Officer Josef Ackermann said he doubted Greece’s ability to overcome severe budget deficits and to completely repay its debt, while former Federal Reserve Chairman Paul Volcker said he fears the eurozone may break up.
Figures out of Spain today show the country’s core inflation turning negative for the first time in 24 years. With unemployment at 20% and deflationary pressures starting to grip the beleaguered country, many fear that a debt restructuring or default could be just around the corner. While planned austerity measures are meant to help the country get back on track, strikes and the potential for civil strife will only exacerbate Spain’s structural problems.
As I mentioned in my earlier report, the eurozone economy is only as strong as its weakest link – a default or restructuring in any one country is likely to have a massive domino effect on the entire region, and will perhaps entice governments to reconsider the current structure of the EU.
With confidence in the eurozone seemingly spiralling into a deep abyss, appetite for eurozone government debt has continued to wane, making it more expensive for countries to raise funds from the open market. Although the emergency funds are on standby for any country that requires it, fiscal tightening across the region is likely to hit consumer spending and depress GDP growth.
A significant slowdown in Europe's economy also puts the US economic recovery at risk, as American companies that export to Europe would face weaker foreign demand, hurting their sales and profitability.
Banks, significant holders of government debt, were among the biggest casualties today. The likes of Barclays, Lloyds , Standard Chartered and Royal Bank of Scotland all plunged between 4% and 5% this afternoon, after Credit Suisse Group warned that European banks may face €244 billion in lost earnings and increased capital requirements because of stringent regulations.
'We believe regulation should remain a key driver in the months to come,' Credit Suisse said in a note to clients today. European bank earnings may be 37% lower than currently forecast for 2012, they said. [1]
An investigation by New York's attorney general into whether eight banks—Goldman Sachs, Morgan Stanley, UBS, Citigroup, Deutsche Bank, Credit Suisse, Crédit Agricole and Bank of America's Merrill Lynch— misled ratings agencies about mortgage-securities activity also rattled investors' nerves today.
Unsurprisingly, shares of Citigroup tanked 3.5% to $3.94 while Bank of America plunged 3.6% to $16.25.
Meanwhile, MasterCard tumbled 7.4% and Visa plunged 8.7% to $78.27 after the US Senate gave the Federal Reserve the power to regulate fees on debit card transactions. The new measure will also allow retailers more leverage in negotiating with credit card firms and banks over the fees for card transactions.
US Treasuries and gold benefited from safe-haven buying this afternoon. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.45% from 3.53% late Thursday. June gold meanwhile touched a record-high of $1,249.7 a troy ounce.
By 3.55pm (London time), the Dow Jones Industrial Average was trading at 10608.52, representing a 174.43-point (-1.62%) decline from yesterday's close. In addition the S&P 500 fell 21.12 points (-1.8%) to 1150.55 and the Nasdaq 100 retreated 42.83 points (-2.25%) to 1901.69. At around the same time, London's FTSE 100 was trading 161.4 points (-2.97%) in the red, while Spain's IBEX 35 was 676.3 points (-6.78%) lower at 9301.20.
Turning to the US economic front, a report released earlier today showed total US retail sales rising 0.4% in April, following an upwardly revised surge of 2.1% the prior month. The latest figure exceeded the 0.2% increase shown in a Bloomberg survey of estimates and follows a previously reported increase of 1.6% in March.
US Industrial production also rose in April, indicating that factories kept powering the economic recovery. Output at factories, mines and utility companies rose by a bigger-than-expected 0.8% last month following a 0.2% gain in March. Production at manufacturers rose 1%. The Reuters/Michigan consumer sentiment index came in slightly below consensus estimates, however, rising to 73.3 in May, trailing Bloomberg’s forecast of a rise to 73.5 from 72.2 in April.
Source: [1], Bloomberg News (14 May 2010)
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'Spread Betting News 14 May 2010', Article by IG Index, last update: 14-May-10
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