Markets stay volatile after posting horrid week of losses
ECB pledges action as European leaders explore an early set-up of permanent rescue fund with €500bn war chest
MARKETS recovered yesterday after a bruising week of losses as the ECB signalled it would take action over the worsening economic picture.
A late rise in the US in particular gave some relief but was too small to undo the main trend of the week.
European governments are exploring speeding up the establishment of a permanent rescue fund as the urgency mounts to halt the debt crisis, an internal working paper shows.
Drawing on paid-in capital, the fund will wield a €500bn war chest that could help shield countries such as Italy. It also includes provisions for sharing costs with bondholders for countries with "unsustainable" debt.
Senior finance officials will next week examine the cost advantages of creating the fund, known as the European Stability Mechanism, in July 2012, a year ahead of schedule, according to a staff paper prepared for the meetings.
At the close of trading yesterday, European shares had recorded the biggest weekly drop for seven weeks. Mining and banking shares were especially hard hit.
The Stoxx Europe 600 Index of European shares closed down 6.1pc for the week and all of its 19 industry groups closed off. The Stoxx Europe has lost 26pc of its value so far this year.
Yesterday, the FTSE-100 index of Britain's leading companies fell below the psychologically important level of 5,000 points, and ended the week down 5.6pc over the week.
In fact, over the week national benchmark indexes retreated in all of the 18 western European markets. Germany's DAX Index was off 6.8pc and France's CAC 40 dropped 7.3pc. A relatively small fall of more than 3pc on the ISEQ means Ireland outperformed the trend.
In Europe, mining companies -- seen as a bet on growth -- led losses. Miner Antofagasta posted the biggest weekly decline in more than 11 years, as copper fell to the lowest in a year. German miner Stada Arzneimittel fell 32pc.
Mining shares are closely linked to commodities, which fell to a nine-month low. Silver, copper and nickel tumbled on deepening concern that policy makers are running out of tools to avert another global recession, hurting demand for metals, fuel and food.
Gold fell below $1,700 an ounce in New York.
The Standard & Poor's GSCI Index of 24 commodities fell as much as 2.2pc yesterday to its lowest level since December 2011. The index was down 7.8pc over the week alone. Silver plunged as much as 12pc yesterday and copper was down 5pc.
"We are seeing commodity prices correcting, so they are more compatible with the global economy," said Christin Tuxen, a senior analyst with Danske Bank in Copenhagen.
"When we have fears over the economic cycle as we have now and a higher probability of contraction, it hits industrial metals and commodities.''
Banks also fell. Barclays, the UK's second-largest bank was down 11pc, while Lloyds Banking Group lost 4.6pc. Germany's Deutsche Bank shares fell 7.9pc and Austria's Raiffeisen was down a staggering 20pc, the biggest decline since November 2008.
Macro-economic news dominated the markets. On Thursday, data showed zero growth in the euro area for the first time in two years and China's economy also faltering.
The euro pared losses against the yen and the dollar after ECB governing council members said the central bank may step up efforts to ease market tensions. The trend in currencies is still a dash to quality, however, and the low-risk yen traded close to the highest level since World War Two.
Meanwhile, talks in Washington between central bankers and finance ministers will continue this weekend. Today political leaders, including Finance Minister Michael Noonan, will discuss the economic outlook at the annual meetings of the IMF and World Bank.