European debt troubles pummel global equities

Stocks across the world sank amid growing concerns of a potential sovereign debt default in Europe, even as global markets were recovering from the recent turbulence owing to concerns on China and new bank regulations in the US. Portuguese bonds come under renewed pressure as fears of Greece’s debt problems spreading in the other parts of the eurozone persisted. Banking stocks from Portugal, Spain, Greece and Ireland slid further as worries about sovereign debt and its potential impact on the eurozone continued to spread. European Central Bank (ECB) President Jean-Claude Trichet said that the eurozone still faces major challenges but is heading in the right direction. He was speaking shortly after the ECB kept interest rates steady. Eurozone governments have borrowed a record €110bn from the markets so far this year, forcing up borrowing costs for those countries with the weakest public finances as they pay a heavy price for their ballooning debt levels.

Meanwhile, China’s government, seeking to stem property speculation, told banks to raise interest rates on third mortgages and demand bigger down payments for such loans. In addition, a senior policy adviser to China's central bank said that asset bubbles were a concern for the nations' policy makers, reflecting official unease about the rapid gains in real estate prices. Overseer of US$700bn government bank bailout program said that Fed policies could be creating US housing bubble similar to one that triggered the 2008 global financial crisis.

Risk premium escalated further amid mounting worries that last year's astonishing recovery could lose steam, particularly in the matured economies, notwithstanding the ultra-loose monetary policies and the unprecedented fiscal stimulus. Gains in the US dollar accelerated as investors and fund managers fled risky assets and sought refuge in the relative safety of the greenback. The US dollar rose to an eight-month high against the euro. The dollar gained amid discouraging signals in several European countries as well as a mixed US jobs report for January.

The cost to protect against a default on European sovereign debt exceeded that of US investment-grade companies for the first time. Bond prices rose, pushing the yields down, amid heightened fears about the fiscal stability of Greece, Spain and Portugal. The dollar’s climb reduced the appeal of commodities as an alternative investment. Crude oil tumbled to a seven-week low as the dollar surged on speculation that European efforts to reduce deficits will curb growth in that region. Crude oil futures posted their worst loss in six months on Feb. 4.

Asian currencies dropped for a fourth week, the longest run of losses since June, as concern that some European nations will struggle to contain and finance budget deficits eroded demand for emerging-market assets. The MSCI Asia-Pacific Index of regional shares slumped to a 10-week low. Emerging-market equity funds lost US$1.6bn in the week ended Feb. 3, the biggest outflow in 24 weeks, according to US-based research company EPFR Global.

The Dow Jones Industrial Average fell below 10,000 level for the first time since Nov. 6. The blue chip US benchmark recovered on the last trading day, albeit marginally, to end above the key level. All the three major US indexes touched three-month lows before recovering on Friday. A three-session rout had sent the US market to its lowest point since last fall. European stocks suffered the biggest weekly slump in 11 months. The Dow Jones Stoxx 600 Index retreated extended the measure’s fourth straight weekly decline to 3.9%.