Tuesday 26 September 2017

Markets plummet over concerns about euro and oil

Ratings downgrade for Spain and weak Chinese trade data push stocks lower

German Chancellor Angela Merkel said she would back lower interest rates on the emergency loans to Greece and Ireland in exchange for privatisations and a common corporate tax base in the euro region. Photo: Getty Images
German Chancellor Angela Merkel said she would back lower interest rates on the emergency loans to Greece and Ireland in exchange for privatisations and a common corporate tax base in the euro region. Photo: Getty Images

Donal O'Donovan and Peter Flanagan

SHARES around the world plunged yesterday as weak economic data from China, a cut in Spain's credit rating and ongoing concerns about the Middle East combined to send prices lower.

European stocks slumped to their lowest close this year, with the Stoxx 600 index of European shares falling 1.2pc. In London, the FTSE 100 plunged 1.6pc. Germany's Dax fell 1pc.

As markets fell around the world, German Chancellor Angela Merkel said she would back lower interest rates on the emergency loans to Greece and Ireland in exchange for privatisations and a common corporate tax base in the euro region. The comments come on the eve of talks to end the European debt crisis.

The sell-off came after Spain's rating was cut by Moody's on fears a banking bailout there could cost a multiple of the country's own estimates.

The cost of Brent Crude oil rose to $116.13 a barrel in London as fears grew that unrest in North Africa and the Middle East would hit oil supplies.

In the US, stock markets were down more than 1.5pc.

"After horrific trade numbers out of China overnight and another downgrade of a sovereign European nation, the 'buy the dip' attitude has started to look wobbly," said Lex van Dam, London-based fund manager at Hampstead Capital.

"Buy the dip" refers to traders betting that a fall in prices is temporary or overdone.

Yesterday, China reported a €5.3bn trade deficit for February. It is the country's biggest monthly deficit for seven years. It means China imported more goods than it exported last month, raising fears that global growth driven by Chinese demand for natural resources and capital goods could falter.

Meanwhile, Spain's downgrade to Aa2 on the eve of today's meeting of eurozone leaders in Brussels was a sharp reminder that the debt crisis was far from resolved.

The cut is a blow to Spanish efforts to distance the country from other distressed euro economies.

Spain sold €4bn of 15-year bonds on Tuesday in what had been seen as a vote of confidence in the country.

The cost to Spain of borrowing over 10 years hit a high of 5.536pc at one stage, but ended the day just below 5.5pc.

Greek, Irish and Portuguese government bonds were all weaker on the news.

Moody's said risks to Spain's public finances were "skewed to the downside". It said that even after the downgrade, it sees the outlook for Spain as negative, blaming sluggish growth that makes it difficult for the county to fix its finances.

Despite the cut, Moody's said it did not expect Spain to have to borrow from the European emergency bailout funds.

Eurozone heads of government are meeting in Brussels today to thrash out changes to the European bailout mechanism. However, few analysts expect agreement on major changes today.

Moody's said Spanish banks could ultimately need up to €120bn in fresh capital but said a figure of €40bn to €50bn was more likely. That would be two-and-a-half times what the government has projected. Ratings agency Fitch said restructuring the banks could cost from €38bn to €97bn.

Gavan Nolan, an analyst at Markit in London, said the downgrade was a reminder that Spain, like Ireland, would suffer disproportionately if the European Central Bank increased interest rates next month.

Irish Independent

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