European markets continue yesterday’s sharp falls

European shares are falling further this morning after a rout on major indices yesterday amid fears of another recession and Europe’s debt problems widening to engulf Italy and Spain.

By 1030 CMT the Dax was off 2.5%, the Cac 40 down 1.1% and Britain’s FTSE 100 was 2.4% lower. In each case their falls have accelerated as the morning continues.

Overnight Asia also fell, with major Japanese and Hong Kong equity indices down by around 4%.

US markets are widely expected to soften today, after falls exceeding 4% yesterday and the Dow Jones Industrial Average having experienced its worst day since December 2008.

Oil dropped yesterday by $3.76 to $82.87 a barrel – the lowest since November last year – while gold hit a new record high of $1681 before falling slightly.

Japan’s finance minister Yoshihiko Noda and China’s foreign minister Yang Jiechi both called for co-ordinated action this morning to contain the Western world’s problems. Noda said policymakers must face currency distortions, debt crises and concerns over US economic health.

German Chancellor Angela Merkel is phoning her French counterpart Nicolas Sarkozy and Spain’s prime minister Jose Luis Rodriguez Zapatero today to discuss the eurozone’s problems after European markets slumped yesterday as European Commission President Jose Manuel Barroso warned the crisis was spreading.

Asset managers are also calling for authorities to step in once more and stem the tide.

Guy de Blonay, manager of Jupiter’s Financial Opportunities fund, warned the crisis would spread without action to support markets.

His calls came despite the European Central Bank yesterday saying it was prepared to offer further liquidity on the Continent if required, and keeping rates at 1.5%. Markets had expected, in vain, a resumption of bond buying.

De Blonay said the market needed to see the ECB boost its support fund four- or fivefold, to feel reassured. “Sovereign risk issues are not only about Greece, Ireland and Portugal but also Italy, Spain and now Belgium,” he said.

Trevor Greetham, Fidelity’s asset allocation director, said: “With growth likely to slow and fiscal policy frozen, we expect to see a further round of monetary easing by year-end and this should ultimately benefit stocks and commodities. In the meantime, the current environment points towards holding a well-diversified portfolio.”

John Ventre, portfolio manager at Skandia Investment Group, said European equities are “cheap by any measure” at eight times forward earnings and four times forward cash-flow.

“Ultimately European equity markets are very oversold, as are equity markets generally. I’ve been keeping plenty of powder dry waiting for an opportunity like this, so for me its time to put money to work. When equity markets are as cheap as they are today investors have a margin of safety.”

Nicola Marinelli, portfolio manager at Britain’s Glendevon King Asset Management, said: “There are only two possible general solutions to the current crisis that is enveloping Italy and Spain: the ‘United States of Europe’, that is fiscal and political union; and a buyer of last resort, namely ECB quantitative easing.

“The former would be a long-term fundamental solution but the social and political environment does not grant it currently. The latter would be a short-term patch that buys more time and it is more doable, even if the ECB has so far rejected it, and has on the opposite embarked on a tightening path.

“If no steps towards these policies are taken quickly then the self-fulfilling spiral for Spain and Italy is likely to gather pace, leading to a major financial and economic crisis.”

 

 

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