A wave of bearishness swept through riskier asset markets as growing nervousness about contagion from the eurozone sovereign debt crisis, plus worrying signals on the global economic outlook, triggered steep falls for stocks, commodities and the euro.
Lena Komileva, global head of G10 strategy at Brown Brothers Harriman, said: “The general and violent repricing of risk at the start of the week suggests the market is increasingly questioning the eurozone’s ability to contain its crisis and prevent a broader shock to global capital markets.
“Europe’s failing approach to its debt crisis has renewed fears of a contagious sovereign default, and a possible eurozone break-up, sending shockwaves across financial markets.”
Concerns about a Greek debt restructuring have been exacerbated by Athens’ lack of progress in meeting the pledges made last year as part of the EU-IMF bail-out.
The government met in Athens on Monday to discuss further cost cutting and privatisations in an attempt to avoid a forced restructuring.
But the big fear was about contagion to larger eurozone economies.
Standard & Poor’s revised its credit rating outlook for Italy at the weekend to “negative”, saying that the country’s growth prospects were weak and that “political commitment for productivity-enhancing reforms” appeared to be faltering.
Luca Cazzulani, fixed-income strategist at UniCredit, said: “We think S&P’s move should be read mostly as a wake-up call to the government, whose effort in terms of growth-enhancing measures has clearly weakened.”
Meanwhile, heavy defeats for Spain’s governing Socialists in regional elections raised concerns over the country’s ability to meet deficit reduction targets.
The yield premiums demanded by investors to hold Italian and Spanish government debt rather than Bunds hit their highest levels for four months.
Greek government bond yields and credit default swaps, which gauge the cost of insuring against a sovereign default, hit euro-era highs.
On the currency markets, the euro sank to its worst level against the dollar for two months – briefly slipping beneath $1.40 – and hit a record low against the Swiss franc. Worries over the broader eurozone outlook were heightened by weak economic figures.
“May’s sharp fall in the ‘flash’ eurozone Purchasing Managers’ Index, driven by developments in France and Germany, brought the strongest signs yet that the core economies’ recoveries are losing steam and will dent hopes that they can pull the periphery out of the crisis,” Ben May, at Capital Economics, said.
PMI data from China also pointed to a slowdown in manufacturing growth, although several economists suggested that an expected moderation in Chinese inflation pressures should allow monetary policy to be loosened if necessary to avoid a hard landing.
But equity markets were less sanguine.
By the close in New York, the S&P 500 was down 1.2 per cent while the FTSE Eurofirst 300 fell 1.7 per cent and the Nikkei 225 Average in Tokyo shed 1.5 per cent.
The US Vix equity volatility index – watched as a broad measure of investor risk aversion – rose 4 per cent, though it was still below the key mark of 20.
Commodity prices suffered hefty losses, with US crude down $2 at $97 a barrel and copper sliding back below $9,000 a tonne in London.
But gold touched its highest for nearly two weeks as it benefited from a flight to safety.
US and German government bonds attracted haven buying.
The yield on the 10-year Treasury fell 2 basis points to 3.12 per cent while the Bund yield shed 6bp to 3.01 per cent.
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