Investor doubts push stocks down sharply

INVESTOR DOUBTS over the basis for economic recovery and euro zone cohesion pushed stocks down sharply yesterday, while the euro struggled to move away from a four-year low.

In Dublin the Iseq closed more than 3 per cent lower, having dropped by 4 per cent in the previous session. The picture was repeated across Europe, with Frankfurt’s DAX falling by 2.02 per cent and the CAC-40 in Paris closing 2.25 per cent weaker.

US stocks were also sliding last night following worse-than-expected US jobless figures and heated debate over financial regulation reform. The SP was down more than 10 per cent on a high reached in April.

“It’s just red, red, red across the screen,” said one Dublin dealer last night. “It’s hard to see where it’s going to bottom out.”

Having steadied slightly overnight, the euro fell 0.6 per cent against the dollar, trading at $1.2358 as European markets closed, beaten down by concerns that the euro zone recovery could be hampered by problems with European sovereign debt and an unco-ordinated shift to greater regulation of financial markets.

Yesterday the German chancellor Angela Merkel reached out to financial markets, saying she needed “honest” advice on how the financial sector should be regulated. The tone was in contrast to her reference to “destructive” trading on Wednesday after Germany unilaterally introduced a ban on some short selling.

But Dr Merkel warned: “We need the financial industry to be honest with us. If we don’t get honesty, then we might not do the right thing technically but we will do the right thing politically.”

Alan McQuaid, chief economist at Bloxham, said the euro would remain under pressure as long as this perceived “power struggle” between France – which is cool on the idea of a short selling ban – and Germany is maintained.

“I just think the whole situation in Europe is negative for the euro,” said Mr McQuaid, adding that euro weakness could easily extend to trade at levels between $1.20 and $1.15.

The euro’s all-time low was $0.8272 in October 2000; the peak was $1.6038 in July 2008.

Vincent Killeen, senior manager at Bank of Ireland Global Markets, said that much of the “bad news” on the currency was already implied in the price, but added that any attempt the euro made to rally yesterday was immediately “shot down”. He expects trading levels of between $1.21 and $1.25 over coming weeks, but said parity is possible in the long run.

Both analysts said a weak euro would ultimately be of benefit to the euro zone as manufacturers struggle to export to other currency areas.

“A little bit of euro weakness is not going to do any harm,” said Mr McQuaid.

Ratings agency Standard Poor’s yesterday said a real exchange rate adjustment should improve the Republic’s external competitiveness and boost the economy’s “already substantial economic stability”.

In a review of the economy, the agency said the Republic was in an economic depression that would last until 2011.

Standard Poor’s said its AA negative rating on Ireland could be lowered again if its estimate of the cost of the bank bailout is exceeded “by a significant margin”.

It said ratings could stabilise if the banking sector recovered more quickly than expected.

Bank of Ireland was the biggest Irish casualty yesterday, with shares falling by 14 per cent at one point in the wake of Wednesday’s shareholder approval of the bank’s fund-raising plans. AIB shed close to 9 per cent.