Global stocks, euro plummet on Spanish region’s aid request

July 20, 2012

U.S. and European stocks fell Friday and the euro hit record lows after Spain’s heavily indebted Valencia region asked for financial aid, increasing investor fears that the Spanish government will seek a full-blown bailout.

Valencia sought help under a $22.1 billion program passed Thursday that aims to bolster regional finances.

Spain’s IBEX stock index fell 5.8 percent, its biggest one-day drop in two years, and the risk premium on government debt hit a euro-era high as its borrowing costs rose to 7.32 percent. That yield is above the 7 percent threshold considered unsustainable, with little relief in sight.

“There is very little to stop Spanish bond [yields] moving up at the moment, and that is a big concern,” said Ed Shing, head of European equity strategy at Barclays.

Martin Briggs, risk advisory consultant for the global payments company AFEX Markets in London, called the euro “a slow-motion train crash that’s happening in front of our eyes.

“No one seems to have the will or the ability to make the tough decisions that need to take place,” Briggs said.

The euro plumbed record lows against the Australian, Canadian and New Zealand currencies and hit multi-month lows against the Norwegian and Swedish crowns. Against the yen, it hit its lowest level in more than 11 years.

The euro fell as low as $1.2143, its weakest level against the dollar since mid-June 2010. It last traded at $1.2164, down nearly 1 percent, as a sell-off against the pound and the Swedish crown exacerbated the euro’s slide.

U.S. stocks snapped a three-day winning streak while stocks in Europe extended losses after the European Central Bank said it would stop accepting Greek bonds as collateral, adding to concerns about the euro-zone debt crisis.

The FTSEurofirst 300 closed down 1.5 percent at 1,048.98.

Banks and insurers, which stand to lose on their sovereign bond holdings and loan books if the euro-zone crisis intensifies, were among the top decliners in Europe. Banks fell 3.7 percent and insurers slipped 1.9 percent.

Spain’s plight overshadowed another round of strong U.S. corporate earnings, including a profit at General Electric and strong advertising revenue at Google.

“The news from Europe continues to be a smoldering mess, and it will be a long, convoluted process before things are resolved there,” said John Kattar, who helps oversee $1.7 billion in assets as chief investment officer at Eastern Investment Advisors in Boston.

German bond prices jumped and U.S. Treasurys rose as investors clamored for safe-haven assets.

German 10-year bond yields fell 5 basis points, to 1.168 percent, and the price of the benchmark 10-year U.S. Treasury note was up $4.80 per $1,000 to yield 1.46 percent.

The U.S. dollar index rose 0.7 percent, to 83.475.

Oil fell below $106 per barrel at one point as a firmer dollar spurred a dip from an eight-week high hit in the previous session due to supply worries linked to tension in the Middle East and hopes of an economic stimulus in the United States.

— Reuters

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