LONDON: European stock markets fell back yesterday on the back of weak industrial output data and a growing crisis at Portugal’s largest lender, Banco Espirito Santo.
London’s FTSE 100 lost 0.68 percent to close at 6,672.37 points, after the Bank of England (BoE) held interest rates as expected at a record-low 0.50 percent. Frankfurt’s DAX 30 slid 1.52 percent to 9,659.13 points, and the Paris CAC 40 dropped by 1.34 percent to 4,301.26.
Milan’s FTSE Mib was down 1.90 percent, Madrid’s Ibex 35 fell 1.98 percent and in Lisbon, the PSI 20 tumbled 4.18 percent.
Gloomy market sentiment turned completely sour after Portugal was rocked by a growing crisis surrounding Banco Espirito Santo (BES), the nation’s biggest bank by market capitalisation.
Portugal’s financial market regulator halted trading in BES shares after they plunged over allegations that its parent company covered up a ¤1.3bn ($1.8bn) hole in the accounts.
“It is mainly concerns about the health of Banco Espirito Santo that has dented market sentiment, with bank shares losing ground across the board,” noted Forex.com analyst Fawad Razaqzada.
“The market is refusing to ignore its potential impact on Portugal and other peripheries,” he added in reference to countries like Greece, Italy and Spain.
A research note from Capital Economics said: “We have been arguing for some time that the markets have become complacent about the financial risks in Portugal and in the periphery of the euro-zone more generally.”
Financial news agency Bloomberg has quoted BES as announcing delays in payments of short term debt by its parent holding company.
In reaction to yesterday’s newsflow, BES shares collapsed by 11.54 percent to just 0.54 euros when trading was suspended.
The shock also sent the yield on 10-year Portuguese bonds higher, as investors feared widespread fallout from the scandal.
At the close of trading, it stood at 3.985 percent, compared with 3.771 percent a day earlier.
Earlier, France and Italy became the latest big European economies to post poor industrial output data, with Italian production falling the most since November 2012. Germany and Britain have already issued disappointing figures for May, raising fears that Europe’s economic recovery may be stalling.
The most recent data, “confirms the weakness of the eurozone” and “provided the excuse to finally kick start the summer volatility trade into life,” remarked Chris Beauchamp, an IG market analyst.
On Wall Street US stocks followed European peers downwards in early trading, with the Dow Jones Industrial Average giving up 0.65 percent to 16,875.54. The broad-based S&P 500 slumped 0.60 percent to 1,961.02, while the tech-rich Nasdaq Composite Index slid 0.80 percent to 4,383
On the foreign exchange market in London, investors digested the BoE’s latest decision to maintain rates at 0.50 percent, where they have stood since March 2009.
Britain’s central bank also opted to maintain the level of cash stimulus in the economy at £375bn ($641bn). Both decisions were in line with market expectations. The British pound dropped to $1.7124 from $1.7159 the day before.
The pound had jumped last Friday to a six-year high of $1.7180 on expectations that London could raise rates in the coming months.
The European single currency fell to $1.3601 from $1.3642 late on Wednesday in New York. The euro also eased to 79.42 pence from 79.50 pence.
In commodity deals, haven investment gold soared to a near four-month high at $1,344.90 per ounce — a level last seen on March 17 — before easing slightly to $1,340.25. “With poor euro zone data and rumblings out of the Portuguese banking system, traders are shunning appetite for risk, instead booking profits or fleeing to traditional safe-havens such as German and UK government bonds or gold,” ETX Capital analyst Daniel Sugarman said.