Market turmoil casts further doubt over Europe revival. / Financial Times.

October 16, 2014

Market turmoil casts further doubt over Europe revival

Elaine Moore, Vivianne Rodrigues, Kerin Hope / http://www.ft.com/intl/cms/s/0/62a7ef66-553c-11e4-b616-00144feab7de.html?siteedition=intl#axzz3GNgddOjM

Turmoil across global financial markets and a spike in Greek borrowing costs on Thursday reignited fears about Europe’s recovery and the structural problems left over from the eurozone debt crisis.

For the first time this year, Greece’s benchmark bond yields rose above 9 per cent as mounting political instability raised doubts about Athens’ ability to sustain its heavy debt burden. European countries hit hardest by the eurozone debt crisis also saw their borrowing costs jump at rates not seen for a year.

Concerns about low global growth kept Wall Street under pressure, but stocks rebounded and US Treasuries erased gains as St Louis Federal Reserve Bank President James Bullard said the central bank should consider delaying the end of its asset-purchase programme.

“Inflation expectations are declining in the US,” Mr Bullard said in an interview with Bloomberg News. “That’s an important consideration for a central bank. And for that reason I think that a logical policy response at this juncture may be to delay the end of the QE.”

The S&P 500 Index, which had appeared to be on the brink of official “correction” territory on Wednesday, rebounded to close in positive territory.

Yields on a 10-year Treasury, the benchmark US borrowing rate, which dropped below 2 per cent on Wednesday for the first time since mid-2013, rose slightly to 2.16 per cent.

Across wider Europe, global investors moved to reallocate their money away from debt issued by countries at the region’s periphery into German bonds, considered the safest and most liquid debt market.

The move sent the yield on 10-year German Bunds to 0.72 per cent during the day – a historic low. Yields on equivalent Italian, Spanish and Portuguese debt rose by about 30 basis points in the morning before falling back.

In European stock markets the FTS Eurofirst 300 fell 3 per cent in the day, dropping to a 13-month low, while the UK’s FTSE 100 fell 2.2 per cent in the day and was down 10 per cent so far this month, a move that qualifies as a technical correction. Stock market volatility levels rose back to mid-2012 highs as measured by Wall Street’s ‘fear gauge’ the Vix.

“Today has been a wild day,” said Salman Ahmed, global fixed-income strategist at Lombard Odier Investment Manager. “And it’s clear investors are asking some significant questions about where fiscal policy is going in Europe.”

As investors expressed concern about Greece’s plan to end its emergency aid programme earlier than expected, the Greek government tried to contain worries about the country’s prospects, saying that it would stay on board with international lenders and complete the economic reform programme agreed with the EU and the International Monetary Fund.

Gikas Hardouvelis, the finance minister, told parliament: “Markets often react excessively . . . Greece will complete its reform programme, and it has the support of the European Central Bank.”

Bank share prices on the Athens stock exchange rallied briefly following the news but fell back again as the benchmark index moved down.

A statement from Jyrki Katainen, the EU’s economic chief, said he still believed Greece has “turned a corner” and was on a path towards economic recovery.

“Europe will continue to assist Greece in whatever way necessary to ensure reasonable financing conditions for the Greek state and to smooth the path back to full and sustainable market access,” Mr Katainen said in the statement.

Meanwhile, the European Central Bank provided some relief to Greece’s banks on Wednesday night, raising the amount of loans available to them. A spokesperson said, however, that the decision should not be viewed as a reaction to recent market stress.

“The last few days have been unbelievable and none of the recent data has been poor enough to warrant the moves we’ve seen,” said Mike Riddell, a bond fund manager at M&G Investments. “There had been a perception that Europe was stable again; now people are questioning that.”

Additional reporting by Claire Jones and Peter Spiegel