Growing fears over the health of Europe’s weakest economies and the outlook for US employment rocked global markets on Thursday, sparking sharp falls in risky assets ranging from equities to oil and gold.
The rout sent investors fleeing to the safety of US government debt, boosting the dollar to its highest level against the euro in more than eight months and sending US Treasury prices higher only days after the Obama administration forecast a $1,556bn deficit for 2010.
“The risk aversion trade is back on as the debt problems of the Europe are for the first time bringing down global markets,” said Gary Jenkins, head of fixed income research at Evolution Securities in London.
The Portuguese, Spanish and Greek markets were among the hardest hit, as investor fears over their mounting public debt undermined confidence in their economies and the ability of their governments to fund burgeoning budget shortfalls.
Portugal’s stock markets fell 4.98 per cent, the biggest single day fall since November 2008. Spanish shares dropped 5.94 per cent to the lowest level since July, while Greek equities fell 3.89 per cent.
Attempts by Jean-Claude Trichet, European Central Bank president, to boost confidence in eurozone public finances, by stressing that they compared “flatteringly” with those of other countries, failed to reassure investors.
In the US, the labour department reported that the number of workers claiming jobless benefits unexpectedly rose by 8,000 to 480,000 last week, casting doubt over the economy’s ability to create jobs.
The S&P 500 fell 3.11 per cent to 1,063.11 – its worst day since April 2009 – to its lowest level in three months. The FTSE 100 dropped 2.2 per cent and the FTSE Eurofirst 300 fell 2.8 per cent. The price of a barrel of oil fell more than 5 per cent, the biggest daily drop in six months. In late New York trading, the benchmark crude oil contract was at $72.98. Gold was also hit, with a fall of 4.3 per cent to $1,062.
Dealers said investors were unwinding trades meant to profit from an economic recovery.
Tobias Levkovich, chief US equity strategist at Citigroup, said: “There has been selling by nervous investors of stocks and commodities, as they still have memories of the losses made in 2008 and want to make sure the gains from 2009 are not lost.”
The debt markets of Europe’s so-called peripheral economies also came under pressure as the yield spread between their bonds and Germany, the benchmark market, widened sharply.
Investors are also worried about the end of central bank emergency support measures that have propped up markets over the past year. With the UK on Thursday putting its quantitative easing programme on hold and the US soon to end its credit easing initiatives, investors fear the markets will come under renewed pressure.
Mr Trichet tried to soothe fears over European sovereign risk, saying the US deficit was expected to hit 10 per cent of gross domestic product this year – compared with about 6 per cent in the eurozone.
However, he kept up the pressure on individual eurozone countries, especially Greece, Spain and Portugal, saying clear plans for bringing public finances under control were of ”paramount importance”.
In Europe, Portugal was the focus of investors’ concerns about the eurozone as the parliament in Lisbon began voting on a bill on financial transfers to the regions. The bill risks undermining the government’s ability to cut its budget deficit, as promised, to 3 per cent of gross domestic product by 2013 from 9.3 per cent last year.
In Greece, tax collectors started a 48-hour strike, raising fears of prolonged social unrest that could derail the government’s three-year deficit-cutting austerity programme.
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