US AND European stock markets were engulfed by a wave of selling yesterday, sending key indices on both sides of the Atlantic to multi-year lows.
Financial companies were hardest hit as expectations grew of more losses, write-downs and attempts to patch up balance sheets. The Dow Jones Industrial Average dropped below the lows seen in March when Bear Stearns imploded, to hit its lowest level since September 2006.
The FTSE Eurofirst 300 index fell 2.5 per cent to its lowest since November 2005 while the Iseq index plumbed depths not seen since August 2004.
The Dublin market’s exposure to property and banking stocks has seen it suffer disproportionately in recent months and news of a €21 million hole in the finances of food group Greencore did nothing for sentiment.
The global pessimism was exacerbated by a note from Goldman Sachs, which said the pace of deterioration in the banking industry “appears to be far worse” than it originally expected.
Goldman cut its recommendation on brokerages from “attractive” to “neutral” and added fellow US bank Citigroup to its “conviction sell” list, saying it may take as much as $8.9 billion in write-downs in the second quarter.
Citigroup fell 5.7 per cent in New York, joined by fellow banks and brokers. Disappointing earnings from technology companies and a fall in General Motors shares to their lowest level since 1955 fed the black mood.
Kevin Gardiner, head of global equity strategy at HSBC, said sentiment was shifting against the financial sector without much concrete extra information on earnings and write-downs. “I think this move reflects how skittish people are right now. A lot of long-only funds are sitting on their hands, so it doesn’t take much more than a turn in sentiment to move a thin market.”
Europe was similar, with financials sinking to the bottom of the large indices. Fortis lost 19.4 per cent after the Belgo-Dutch financial services group said it would cancel its interim dividend and place €1.5 billion in new shares to shore up its capital ratios.
Credit markets also soured as the price of insurance against the risk of the big US brokers defaulting on their debt jumped sharply. In Europe, the iTraxx Europe index closed above 100 basis points for the first time in two months.
Money in search of a safe-haven flowed back into US government bonds, boosting prices and pushing down yields. The movements came as investors scaled back their bets on an imminent interest rate rise from the US Federal Reserve.
In currency markets, the dollar fell 0.4 per cent to a near three-week trough against the euro. The euro was bolstered by the market’s belief that Jean-Claude Trichet, European Central Bank governor, is robustly hawkish. The single currency hit an all-time high against the yen, with Japan’s currency hampered by expectations that the Bank of Japan will keep interest rates on hold.
The lower dollar had ramifications for commodities, sending gold prices to a one-month high. Oil climbed $3.45 a barrel after Opec’s president said crude could rise as high as $170 a barrel this summer. – (Financial Times service)
