European Indexes Slide 2%, ECB to Defend Italian, Spanish Bonds

Devan Biswas
08 Aug, 2011
New York City

European markets struggled in the morning trading after investors reacted to the U.S. debt downgrade and the ECB said it will actively participate in defending bonds of Italy and Spain. Resources linked companies led the decliners and the euro traded near its recent levels.

[R]4:05 PM Frankfurt – European markets struggled in the morning trading after investors reacted to the U.S. debt downgrade and the ECB said it will actively participate in defending bonds of Italy and Spain. Resources linked companies led the decliners and the euro traded near its recent levels.[/R]

The European markets opened sharply lower and the indexes in Paris, Frankfurt, Stockholm and Zurich fell as much as 3%. Indexes recovered in the mid-morning but plunged after the weak opening in New York. The DAX index plunged as much as 5%.

Investors were able to react for the first time after late Friday U.S. debt rating was downgraded the U.S. debt rating. The decision was anticipated but not expected till late September.

S&P left its view on the short term debt unchanged and lowered only the long term debt rating and cited that the U.S. needs at least $4 trillion in spending cuts or revenue increase to meet lower its $14 trillion in debt.

In addition, German Chancellor Angela Merkel resisted the calls to increase European rescue fund size from the current 440 billion euros. And, over the weekend G7 meeting of ministers also pledged to support liquidity in the financial markets.

Bond yields of Spain and Italy tightened a fraction but still traded near 5.3% after a statement from the Governing Council of the European Central Bank that it will actively implement its bond purchase program. Market took that as a sign that the central bank was supporting the Spanish and Italian bonds today.

Italian bond yield dropped 79 basis points to 5.35% and Spanish bond yield fell 80 yields to 4.24%.

Indexes in Japan and Asia declined after late Friday Standard & Poor’s cut rating on the U.S. debt from its highest AAA rating to AA+. The other two agencies left the rating unchanged on August 2 after the U.S. lawmakers struck a debt and spending agreement.

In Paris CAC-40 Index declined 125.17 to 3.8% to 3,153.39 and in Frankfurt DAX Index plunged 282.04 or 4.5% to 5,954.12. In the last week, the CAC-40 Index plunged 10.21% and the DAX Index plummeted 13.68%.

Market indexes in Spain and Italy fell 1.8% and 2.3% respectively but in Stockholm, Zurich, Athens and Lisbon declined between 3% and 4%.

The euro fell to $1.426 from $1.428 and fell to all new low against Swiss franc to 0.7485 from 0.7675 franc.

Stock Movers

Banks in Italy and Spain traded higher after talks of the ECB supporting Italian and Spanish bonds.

Spain based Santander increased 2.2% to 6.50 euros and Banco Bilbao Vizcaya Argentaria SA added 2% to 6.60 euros. UniCredit and Intesa Sao Paolo edged up a fraction.

Mining and resources stocks were the leading decliners after oil and base metals declined.

Rio Tinto fell 4.8% to 3,449 pence and BHP Billiton declined 3% to 1,887 pence on the global economic worries.

Aircraft maker and defense contractor EADS fell 6% to 20.38 euros and Siemens in Frankfurt trading lost more than 2%.

BNP Paribas was unchanged and Societe Generale SA declined 1% to 26.32 euros. Credit Agricole SA fell 12 cents to 7.03 euros.