European Markets Tumble

A wave of nerves ran through Europe's financial markets Tuesday, sending share prices and the euro lower.

Sovereign-debt concerns returned with a vengeance, as Thursday sees the expiry of the European Central Bank's €442 billion ($542.51 billion) of one-year loans to euro-zone banks.

As a result, market participants were nervous about the ability of banks in the "peripheral" euro-zone countries to meet their obligations.

"A brutal step up in risk-aversion flows emerged overnight but must be viewed as the logical extension of what has been brewing for a couple of weeks," said Kenneth Broux, senior market economist at Lloyds TSB.

"The circumstances are obviously circumspect but are not being helped by the unfortunate timing of the expiry of ECB one-year funds, growing fears of a relapse in the U.S. economy and the typically supportive role that month-end and quarter-end play for government bonds."

Meanwhile, fears about China's economy compounded the falls across Europe, and an unexpected improvement in the headline index of economic sentiment in the euro zone did little to help.

The Stoxx Europe 600 index had declined 1.7% to 247.08. London's FTSE 100 was down 1.9% at 4976.56, and moving closer to its 2010 intraday low of 4898.49. Frankfurt's DAX index was 2.1% weaker at 6025.46, and Paris's CAC-40 index was off 2.5% at 3487.62.

There was much caution about the ECB's 12-month refinancing operation. Banks are due to pay back €442 billion on Thursday, resulting in a likely sharp reduction in surplus liquidity conditions despite a special offer of six-day liquidity, and upward pressure on money-market rates, said Credit Agricole.

Meanwhile, on Tuesday, the Chinese market tumbled on concerns about the slightly lower-than-expected pricing range for the domestic part of Agricultural Bank of China's initial public offering, suggesting that investment activity may be slowing down. At the same time, a surprise revision to a leading indicator contributed to the sharp fall in Chinese equities.

This weighed heavily on the mining sector due to concerns about reduced raw-material demand from China. The Stoxx Europe 600 basic-resources index was down 3.1% at 486.12.

Concerns about the European banking systems prompted European corporate credit default swap indexes to widen and the five-year CDS on Spain rose to the record wide of 2.75 percentage points last reached on May 6.

As a consequence of the downbeat sentiment, U.S. stocks were expected to start lower and the September Dow Jones Industrial Average futures contract was trading 1% lower at 9990.0 while the September S&P 500 future was down 1.1% at 1059.5.

In Asia, the Shanghai Composite plugned 4.3%. Japan's Nikkei Stock Average fell 1.3%, while South Korea's Kospi declined 1.4%. Hong Kong's Hang Seng Index lost 2.3%.

In the European foreign exchanges, the euro was trading at $1.2190, down from $1.2277 late in New York Monday, while the euro posted new lows against the Swiss franc, falling to 1.3250 francs, before edging back to 1.3258 francs.

Among other assets, spot gold was at $1238.30 per troy ounce, down 70 cents from late New York Monday, and the front-month August Nymex crude oil futures contract was down $1.59 at $76.66 per barrel.

Source: 

http://online.wsj.com/article/SB10001424052748704103904575336092702995312.html?mod=WSJ_Markets_LeadStoryEurope