The spectre of Europe’s debt crisis returned to haunt financial markets yesterday as shares suffered their longest losing streak for more than a decade.
The Stoxx index of Europe’s 600 leading companies fell for an eighth day in a row, the worst run since 2003. In London the FTSE 100 fell 15.73 to 6,195.91, taking losses since the index’s 14-year high on 4 September to £179bn.
Fresh worries over eurozone strugglers such as Greece and Spain also prompted a widespread sell-off of European sovereign debt, as investors also grappled with the prospect of slowing global growth – which has sent oil prices plunging – and uncertainties such as the spread of the deadly ebola virus. In New York the Vix index of volatility – Wall Street’s so-called “fear gauge” – hit its highest level since December 2011.
The European Central Bank (ECB) president Mario Draghi drew a line under two years of turmoil in the eurozone in June 2012 with a pledge to do “whatever it takes” to prop up the single currency.
But traders savaged European sovereign debt markets yesterday in an uncanny echo of the crisis, with the beleaguered Greek economy in the firing line.
Investors have been spooked by the prospect of new elections that could bring the left-wing Syriza party to power; it wants to renege on Greece’s recent bailout loans.
Greece’s benchmark cost of borrowing for 10 years has soared from 5.6 per cent last month to 8.71 per cent, while the nation’s main stock market sank 2.5 per cent yesterday and is down a mammoth 12 per cent in two days.
Spain – which failed to cover a €3.5bn (£2.8bn) debt auction – was also hit by a sell-off alongside Italy, France and Portugal. Even UK and German debt markets were not spared the sell-off as traders sought the ultimate safe haven of US Treasury bonds.
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Growth in the eurozone stagnated between April and June, and dire economic data since then – including Germany’s worst plunge in exports for five years – has left the bloc on the brink of outright economic contraction in the current quarter. Investors are also questioning how far the ECB is willing to go to support the region after Mr Draghi evaded questions on the scale of the central bank’s private sector asset purchases.
The eurozone is also at risk of descending into damaging deflation territory, with inflation confirmed at just 0.3 per cent in September yesterday.
Nicholas Spiro, of Spiro Sovereign Strategy, said: “This is not the debt crisis of 2011, which was about the breakup of the eurozone. This is about worries over deflation and the Japanification of the eurozone. Investors are questioning the so-called recovery and the commitment of the ECB. We are in for a long bout of volatility.”
US policymaker James Bullard yesterday suggested the US Federal Reserve should extend its programme of money printing to boost growth; it is due to be wrapped up this month.
The Fed’s quantitative easing programme has been scaled back from $85bn (£53bn) to $15bn but Mr Bullard said: “Inflation expectations are declining in the US. That’s an important consideration.”