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European markets are taking stock after sharp initial falls following Donald Trump’s victory in US presidential election.

The UK’s FTSE 100 index fell 2% at the start of trading before paring back some losses to trade 0.7% lower at midday.

Image source Wikipedia

Image source Wikipedia

Other major European stock markets also fell, with money flowing into safe haven stocks, gold and currencies including the yen.

Traders had expected Hillary Clinton to beat Donald Trump to become the next US president.

France’s Cac index and Germany’s Dax are each down about 1.5% after heavier falls at the start of trading.

Some analysts have likened the shock of a Trump victory to the Brexit result earlier this year.

However, neither markets nor currencies have swung as wildly as they did after June’s EU referendum.

US stock futures fell dramatically overnight as Donald Trump’s lead became clear, although the Dow Jones index is now expected to lose 2% – about 400 points when it reopens – compared to earlier predictions of a 4% fall.

Asian markets were described as a “sea of red” at one point, before seeing their losses narrow towards the end of Wednesday trading.

Japan’s Nikkei 225 finished 5.4% lower, but the Hang Seng in Hong Kong and the Shanghai Composite – which closed later – lost 2.2% and 0.6% respectively.

Global markets have fallen sharply after the Federal Reserve signaled it may begin to scale back its stimulus of the US economy later this year.

European stock markets were down 3% or more by the close, as US markets fell a further 1.5% at their open.

Other risky investments, such as bonds and commodities also fell, with short-term cash offering the only safe haven.

The dollar rose as markets anticipated US interest rates rising sooner than had been thought, while the yen fell.

The markets were spooked after Fed chairman Ben Bernanke said that if the central bank’s forecasts were correct, it could begin slowing down its “quantitative easing” programme of asset purchases by the end of 2013, and wind them down completely by the middle of 2014.

The end of the asset purchase programme would mark a return to the use of interest rates as the monetary policy weapon of choice.

The Fed has been buying bonds at a rate of $85 billion a month, but believes it may be able to scale this back as the US economy recovers and end the programme next year.

The Fed has kept short-term interest rates in a range between zero and 0.25% since December 2008.

Although they are expected to remain close to zero for at least a couple more years, Ben Bernanke’s comments raised market expectations that the short-term cost of borrowing would rise sooner than had previously been thought.

Ben Bernanke emphasized that the programme was tied to how well the US economy, and in particular the US jobs market, was doing.

However, his comments led to a widespread equity sell-off in the US late on Wednesday, with US markets down 1%.

The rest of the world followed suit on Thursday, with the market slide gaining momentum, with US markets falling further after they reopened.

The latest market sell-off continues a steady decline in share prices worldwide over the last month.

It repeats similar market sell-offs at the same point in the interest rate cycle in 2003 and in 1993-94 when investors started to anticipate a return to interest rate rises.

The expectation of rising interest rates also infected bond markets, which normally provide a safe haven from falls in the stock market.

Global markets have fallen sharply after the Federal Reserve signaled it may begin to scale back its stimulus of the US economy

Global markets have fallen sharply after the Federal Reserve signaled it may begin to scale back its stimulus of the US economy

The 10-year US Treasury bond fell sharply in price on Wednesday, causing its yield – the yearly return earned by investors and the implied cost of borrowing of the US government – to rise from 2.19% to 2.35%. On Thursday morning, the rate crept higher to 2.38%.

Borrowing costs also rose in other countries – particularly for debtors deemed by markets to be riskier, including recession-hit southern European countries such as Spain and Italy.

Even the yield on super-safe German government bonds edged higher, in part due to the widely perceived unwillingness of the European Central Bank to cut eurozone interest rates.

Investors have also been rattled by events in China, where the country’s economy appears to be slowing sharply, and its banking system is experiencing severe stress as the Chinese central bank seeks to rein in what the authorities increasingly see as the excessive and opaque lending of recent years.

With the central bank unwilling to make cheap loans easily available, the interest rate at which Chinese banks were willing to lend to each other overnight jumped to an unprecedented annualised 30% on Thursday.

The double-digit, reminiscent of the 2008 Western financial crisis, may imply a collapse of confidence in the interbank market as well as an unwillingness of the central bank to accommodate the banks.

There are widespread fears that the state-owned banks may be facing heavy losses on the glut of loans they rushed out over the last five years in order to keep the Chinese economy afloat despite the stagnation of its main Western export markets.

Evidence that both the US and Chinese central banks were taking their foot off the economic accelerator also depressed global commodities market.

China is the dominant consumer of many of the world’s raw materials, particularly industrial metals, iron ore and other materials used in its construction boom.

The price of copper futures – a bellwether of Chinese demand – fell 2.4% and threatened to break through lows set in April.

The prospect of higher interest rates in US dollars also translated into a stronger US currency.

All major currencies fell against the dollar, as did the price of precious metals.

Gold resumed its rout of recent months, dropping another 6% on Thursday. It is now down 28% since the apparent bubble in the metal burst in October.

The price of silver – the more volatile of the two – fell 6.4%.

The metals have proved popular among investors who fear that the Fed’s money printing would eventually result in sharply rising prices – something that has as yet failed to materialize.

However, they failed to enjoy their traditional safe haven role in the current market turbulence – a role that has instead been usurped by US dollar cash.

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The European Union is due to begin a two-day summit in Brussels that will focus on issues surrounding the eurozone crisis.

High on the agenda will be controversial plans for a eurozone banking union, seen as a key element in restoring confidence in the euro.

In the run-up to the summit, Germany has been urging EU states to consider pooling more economic sovereignty.

Meanwhile Greece, which is at the centre of the European debt crisis, is braced for another general strike.

It will be its 20th since the debt crisis erupted in the country two years ago.

Talks in Brussels are also expected to focus on banking supervision, stricter fiscal oversight and direct recapitalization of banks from rescue funds.

The summit will take place amid calmer European stock markets than in previous meetings and with less concern over the debt crises in Spain and Greece, analysts say.

Speaking on Wednesday, French President Francois Hollande said an end to the eurozone crisis was “very close” and he wanted a deal agreed on the first stage of a banking union.

German Finance Minister Wolfgang Schaeuble has proposed a full fiscal union – control at European level of tax and spending.

On Wednesday, Wolfgang Schaeuble said that eurozone countries “need to tackle problems themselves”, adding that the eurozone bailout fund was there to help countries do just that.

But he reiterated his view that further steps towards political integration would strengthen the bloc.

The meeting in Brussels will be the fourth time that leaders of the EU’s 27 nations have met this year.

Borrowing costs for struggling eurozone economies have fallen sharply since the European Central Bank (ECB) announced last month that it was prepared to buy their bonds in unlimited amounts under strict conditions.

The calmer economic climate is being used to discuss buttressing economic and monetary union, and little will be agreed at this summit.

On Wednesday, Greece and its international creditors are said to have reached a deal on austerity measures needed before its next bailout installment.

Nevertheless, large demonstrations are planned across the country against the next package of spending cuts.

Taxi drivers, ferry workers, doctors, teachers and air traffic controllers are among those taking part in a general strike across the public and private sectors.

 

European Central Bank’s president, Mario Draghi, has unveiled details of a new bond-buying plan aimed at easing the eurozone’s debt crisis.

Mario Draghi said the scheme would provide a “fully effective backstop” and that the euro was “irreversible”.

The ECB aims to cut the borrowing costs of debt-burdened eurozone members by buying their bonds.

Ahead of the announcement, the central bank kept the benchmark eurozone interest rate unchanged at 0.75%.

Mario Draghi said the ECB would engage in outright monetary transactions (OMTs) to address “severe distortions” in government bond markets based on “unfounded fears”.

He insisted that the ECB was “strictly within our mandate” of maintaining financial stability, but reiterated the need for governments to continue with their deficit reduction plans and labor market reforms.

He added that the ECB’s actions came in response to eurozone economic contraction in 2012, with continued weakness likely to continue into 2013.

The ECB expects the eurozone economy to shrink by 0.4% in 2012 and grow by 0.5% in 2013, with inflation rising to 2.6%.

European Central Bank’s president, Mario Draghi, has unveiled details of a new bond-buying plan aimed at easing the eurozone's debt crisis

European Central Bank’s president, Mario Draghi, has unveiled details of a new bond-buying plan aimed at easing the eurozone's debt crisis

OMTs will only be carried out in conjunction with European Financial Stability Facility or European Stability Mechanism programmes, he said.

In other words, countries will still have to request a bailout before the OMTs are triggered.

The maturities of the bonds being purchased would be between one and three years and there would be no limits on the size of bond purchases, he added.

The ECB will ask the International Monetary Fund to help it monitor country compliance with its conditions.

Responding to the plans, Peter Westaway, chief economist for Europe at asset manager Vanguard, said: “This is just the good news that was priced by the markets, and it has now been confirmed.

“There is a long-term question of whether this will be enough to meet the long-term financing needs of Italy, and that probably remains.”

European stock markets reacted positively to the announcement, with the FTSE 100 surging 2.1%; the German Dax, 2.91%; the French Cac 40 index, 3.06%; and the Spanish IBEX, 4.91% at the close.

Bank shares in particular rose sharply on the news, with French banks Credit Agricole and Societe Generale up 8.44% and 7.76% respectively, while in Germany, Deutsche Bank rose 7.06% and Commerzbank, 5.25%. In London, Lloyds Banking Group rose 6.69%.

However, the euro fell back against the dollar to $1.2571 following its high of $1.265 reached before the ECB announcement.

While Mario Draghi was announcing the ECB’s plans, German Chancellor Angela Merkel was meeting Spanish Prime Minister Mariano Rajoy for talks on the eurozone crisis.

In a joint news conference afterwards, Angela Merkel said: “We have to restore confidence in the euro as a whole, so that the international markets have confidence that member countries will fulfil their commitments.”

Mariano Rajoy said: “We want to dispel any doubts on the markets about the continuity of the euro.”

Jens Weidmann, president of Germany’s Bundesbank, remains vigorously opposed to the ECB’s plan, concerned that member states could become hooked on central bank aid and failed to reform their economies sufficiently.

But the majority of the 23 ECB council members support the plan.

And the Organization for Economic Co-operation and Development (OECD) added its support for the ECB bond-buying plan on Thursday, as it warned that the eurozone crisis posed the greatest risk to the global economy.

It is calling for more action from central banks to prevent a break-up of the eurozone.

“Concerns about the possibility of exit from the euro area are pushing up [government bond] yields, which in turn reinforces break-up fears,” the OECD said in its global economic outlook.

“It is crucial to stem these exit fears. This could be achieved by the ECB undertaking bond market intervention to keep spreads within ranges justified by fundamentals.”

Mario Draghi is hoping that ECB intervention in the bond markets will help reduce the borrowing costs of debt-laden countries such as Spain and Italy and lessen the likelihood of them needing to ask for a full sovereign bailout, an eventuality that could bankrupt the eurozone and cause the collapse of the euro.

Spain, which has already asked for 100 billion euros in state aid to help its debt-stricken banks, is currently paying yields of 6.42% on its 10-year bonds, while Italy’s 10-year bond yields are 5.51%, below the critical 7% figure thought likely to trigger a sovereign bailout request.

Outright Monetary Transactions (OMTs)

The term used for the European Central Bank’s programme of buying government bonds with maturities of between one and three years with the aim of reducing a specific country’s borrowing costs. OMTs are only triggered if a country has applied to the European Financial Stability Facility or European Stability Mechanism for financial assistance and are conditional on a government putting in place financial reforms approved by eurozone financial authorities and monitored by the International Monetary Fund.

 

 

European markets have risen after a weekend poll in Greece showed growing support for a pro-austerity conservative party.

The survey suggested the New Democracy party could gain about a quarter of the votes, leaving it as the biggest party, albeit without overall control.

Elections are due to be held on 17 June.

London, Paris and Frankfurt stock markets all rose at least 1%.

European markets have risen after a weekend poll in Greece showed growing support for a pro-austerity conservative party

European markets have risen after a weekend poll in Greece showed growing support for a pro-austerity conservative party

Spain’s leading IBEX index was out of step with the rest of Europe, falling by 0.5%.

Spain’s Bankia, which late on Friday asked for an injection of 19 billion Euros ($24 billion) in state support, fell 27% as it resumed trading on Monday. Its shares had been suspended on Friday pending the funding request.

Meanwhile, bond markets continued to reflect the tensions in the eurozone with the difference between the premium investors demand to hold Spanish government bonds and that of their German counterparts, at a record high.

The spread between 10-year Spanish and German bonds rose to 5.05 percentage points after Spanish government bond yields rose to 6.43%.

Italian government bond yields also ticked higher, rising to 5.87%.

London’s FTSE 100 share index was up 1%, Frankfurt’s DAX up 1.2% and Paris’s CAC 40 was up by 1.1%.

Although both Germany and France have a public holiday on Monday, their equity markets remain open.

 

European stock markets had a shaky start on Friday as concern continued over Greece and Spain.

Spain’s main share index fell more than 2% before recovering, while shares in London fell by as much as 1%.

Confidence in European banks was undermined by ratings agency Moody’s, which cut the credit ratings of 16 Spanish banks late on Thursday.

It also cut the debt rating on Santander UK, a subsidiary of the Spanish banking giant.

However, shares in Santander reversed early losses to trade 3% higher, and Bankia shares jumped 9% following Thursday’s 14% slump.

Moody’s said there were several reasons behind the downgrade, including Spain’s slide back into recession, the financial challenges facing the Spanish government and bad loans in the property industry.

But Moody’s also recognized that banks had made progress in improving their financial situation, and noted the European Central Bank was providing support.

The proportion of loans that have gone bad at Spanish banks hit a record 8.37% in March.

That was according to figures from the Bank of Spain on Friday.

European stock markets had a shaky start on Friday as concern continued over Greece and Spain

European stock markets had a shaky start on Friday as concern continued over Greece and Spain

Despite rising bad debts and downgrades, and reports of large withdrawals from troubled banking group Bankia, the Spanish government does not expect a run on the country’s banks.

Spanish Treasury Minister, Inigo Fernadez de Mesa, said: “This is a scenario I do not contemplate. The Spanish banks have plenty of liquidity. They have been funded through the central government for the next two years, so there is no problem of liquidity at all in Spain.”

Nevertheless, some investors moved money into German bonds, which are seen as low-risk investments. That drove the yield on 10-year German bonds down to 1.399% on Friday, a record low.

Confidence has also been knocked by the political crisis in Greece, where politicians are preparing for the second election in six weeks.

It is possible that the election on 17 June will result in a government that would refuse to implement the austerity measures that Greece’s last remaining international creditors are insisting on.

Speculation is increasing that Greece may have to leave the eurozone

The challenges facing Greece and Spain will be under discussion this weekend at the Group of Eight (G8) summit at the US Presidential retreat Camp David in Maryland.

President Barack Obama will host leaders from Britain, France, Germany, Italy, Russia, Japan, Canada, and the European Union.

“The G8 meeting in Camp David today and tomorrow will be used to pressure Eurozone politicians to take immediate and decisive action to stop contagion ripping the region apart,” said the Dutch bank Rabobank in a research note on Friday.

“Whether the meeting will bring any signs that eurozone politicians may be willing to allow Greek to exit the system remains to be seen, but this type of rhetoric would likely have to be pre-empted by policies designed to limit contagion tightening its grip on Spain,” the note said.

In Asia, stock markets registered heavy losses. Tokyo’s Nikkei average fell 3%, the biggest one day fall since last August.

Asian markets were also hit by losses in New York, where the Dow Jones closed more than 1% lower.

Investors were discouraged by two weak reports on the US economy.

“There is no resolution to the [European] problem yet, and we also we had very disappointing US data, so overall, it’s negative and further denting market sentiment,” said Frances Cheung, a senior strategist, at Credit Agricole CIB in Hong Kong.

In Asia, banking shares were hurt after the chief executive of ANZ said volatile market conditions meant that Australian banks were not lending to each other.

The wholesale lending markets are an important source of funds for banks.

“Right now, markets are closed again, and this is what happens in this sort of situation,” said ANZ chief executive Mike Smith.

 

Euro fell against the dollar and the pound on Monday following French and Greek election results, which cast doubt on European austerity plans.

Pro-bailout parties in Greece performed poorly, while Francois Hollande won the French presidency, promising to focus more on growth.

The euro fell as low as $1.295, its lowest since January, and dropped to three-year lows against the pound.

The main European stock markets fell early on before recovering.

In Germany, the DAX fell by more than 2%, but by mid-afternoon was only down by 0.1%.

In Paris, the CAC 40 recovered to trade up by 0.7%.

Athens shares fell by as much as 8.3%. In London, markets were closed for a bank holiday.

Euro fell against the dollar and the pound on Monday following French and Greek election results, which cast doubt on European austerity plans

Euro fell against the dollar and the pound on Monday following French and Greek election results, which cast doubt on European austerity plans

In New York, the Dow Jones opened down by 0.3%.

The interest rates on some government debt has also gone up, indicating a fall in investor confidence. The yield in the secondary markets for Greek 10-year bonds has gone up from 20% to 22.2%.

Asian markets also fell, with the Nikkei in Tokyo dropping 2.8%. South Korea’s KOSPI shed 1.8% and Hong Kong’s Hang Seng dropped 2.4%.

In Greece, the socialist Pasok party saw an unexpectedly poor result, while Syriza, which has opposed austerity measures, had a strong performance.

The result has cast doubt on whether the country’s policies that currently include large spending cuts, tax increases and state job losses, can continue.

“The knee-jerk reaction was a little strong, but there’s chaos in Greece, and [politicians] being against the deal that was already agreed upon is almost like progress being set back a year and a half,” said Scott Freeze, president of StreetOne Financial.

While the French result was expected, there is still concern about whether Francois Hollande will be able to work as closely with German Chancellor Angela Merkel as his predecessor Nicolas Sarkozy did.

The two were the driving force behind the eurozone’s fiscal compact.

Francois Hollande stood on a platform of promoting growth rather than concentrating on austerity.

“The global financial markets aren’t thrilled by the idea that France and Greece have voted for governments less willing to work with the Germans on a consistent approach to addressing their fiscal deficits,” said Dick Green at Briefing.com.

During the campaign, Francois Hollande pledged to renegotiate the fiscal pact in which European countries agreed to strict controls on their budgets.

But following his victory, and the defeat of the governing coalition parties in Greece, Angel Merkel said that the deal was “not up for grabs”.

“It is a matter of principle in Europe that following elections, be they in small or large countries, we do not renegotiate what’s already been agreed,” she said.

“Otherwise we could not work together in Europe.”

The ratings agency Standard and Poor’s, which downgraded France from its triple-A rating in January said the election result would have no immediate impact on its credit status.

“We will analyze the policy choices of France’s president elect and the new government, taking into account the outcome of the parliamentary elections in June,” the agency said.

“The chances are that the next move is going to be down. The chances are it’s going to be slightly earlier than it would have been otherwise, but the agencies themselves will have a measured response,” said Georg Grodski, head of credit research at Legal and General.

“There is still hope that Mr. Hollande will tone down some of his rhetoric and accept that you can’t fix an economic problem by living on other people’s money.”