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Fear Spreads to Europe’s Stock Markets

August 10, 2011

The fear that has gripped Europe’s sovereign debt market for months took root in its stock markets as investors increasingly worried yesterday about uncertain growth prospects for some of the continent’s biggest companies.

Spain and Italy watched their borrowing costs drop further in signs of success for a massive central bank move to quell Europe debt’s crisis, but stock markets were in turmoil as stronger economies showed worrying signs of slowing.

Germany’s stock market was down for the 10th consecutive day and new data from Europe’s growth engine showed that export growth — a very closely watched economic indicator — was slowing down.

The Federal Statistical Office said exports in June were up by 3.1 percent to 88.3 billion euros (US$126 billion) on the year, the smallest increase in 16 months.

Germany has sailed through the debt crisis relatively unscathed. Despite much grumbling over the big contributions to the rescue packages for Greece, Ireland and Portugal, the eurozone’s largest economy enjoyed stellar growth last year.

However, if the current stock market sell-off continues, this may soon change. Since July 22, the day after eurozone leaders decided to give their bailout fund new powers, but refused to expand its size, Germany’s main stock index, the DAX, has lost more than 20 percent. That’s more than the 15 percent drop seen on the FTSE-100 in Britain or the 17 percent dive on the French CAC-40.

Closely watched German indicators of consumer confidence and business confidence also declined more than expected last month.

German output grew by 3.6 percent last year and the government in Europe’s biggest economy hopes growth this year will again top 3 percent, but in France — Germany’s biggest trading partner — growth is likely to only be 0.2 percent in the third quarter, the central bank said this week.

The Bank of France’s monthly industrial survey showed both corporate order books and factory utilization rates falling for the second month in a row last month.

The benchmark in France recovered from earlier losses and was slightly up in early afternoon trading, but the DAX was 1.4 percent lower, echoing Monday’s plunge on Wall Street, where the Dow Jones fell a dizzying 634 points.

“Investors are worried about rising global recession risks, the threat of a major bank bust, and a loss of confidence in G20 policymakers ability to resolve current economic and financial problems, especially in the eurozone,” analyst Neil MacKinnon of VTB Global Securities said.

The negative sentiment on stock markets contrasted with somewhat declining tensions on the Spanish and Italian bond markets, where intervention by the European Central Bank was starting to have an effect.

The yield, or interest rate, on Spanish 10-year bonds was at 5.03 percent, after approaching 6.5 percent just a week ago. The yield on the Italian equivalents was at 5.14 percent, also about 1 percentage point below where it was on Monday morning.

“It is the worst crisis since World War II and it could have been the worst crisis since World War I if leaders hadn’t taken the important decisions,” European Central Bank President Jean-Claude Trichet said on French radio station Europe 1, defending the bank’s decision to further intervene in the bond markets.



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