World stock markets slump on eurozone

May 25, 2010
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, LONDON, May 25 – Global stocks slumped on Tuesday, rattled by fears the European debt crisis could torpedo economic recovery and rising tensions on the Korean peninsula, dealers said.

London tumbled by almost 3.0 percent to strike the lowest level since early September 2009, Frankfurt shed more than 2.5 percent and Paris plummeted 3.0 percent.

Madrid collapsed by about 3.5 percent after the Spanish central bank rescued provincial lender CajaSur over the weekend, heaping more pain on the country\’s already-strained financial system.

Sentiment also took a knock following news of an enormous four-way merger in Spain\’s troubled banking sector.

Asia meanwhile flicked into sell-off mode on reports that North Korea had put its civilians and troops on combat alert following an investigation blaming it for the sinking of a South Korean ship in March.

Tokyo wiped out 3.06 percent, hitting the lowest level since November 30, Hong Kong erased 3.47 percent and Shanghai shed 1.90 percent.

The growing Korea crisis added to the sense of panic already shaking markets as a result of the eurozone debacle.

"The bloodbath continues on equity markets as a heightened sense of concern creeps back in to traders\’ minds," said analyst Owen Ireland at trading house ODL Securities.

"Whilst the previous falls could have been interpreted by some as buying opportunities, there now appears to be deeper-rooted misgivings about the health of the global economy."

Stocks were sharply sold off as many traders sought to exit investments that are deemed as risky.

"As a risky asset, (equities) are much more vulnerable to unexpected political shocks and there are plenty of those around at present, with growing tension in Korea the latest example that has hit markets," said Altium Securities economist Ian Williams.

Risk aversion had already risen after US and European investors sold the euro and stocks amid mounting concern about Spain.

The rescue of CajaSur could cost up to 2.7 billion euros according to media reports.

Meanwhile, four other Spanish savings banks — Caja de Ahorros del Mediterraneo, Cajastur, Caja Extremadura and Caja Cantabria — revealed Monday that they would merge into a single bank, Sistema Institucional de Proteccion.

That will become the fifth largest financial institution in Spain, according to market watchers.

"The Bank of Spain is pushing hard to speed up the restructuring process of the Spanish banking system," noted Citigroup analyst Giada Gianai.

CajaSur\’s rescue came as the Spanish government introduced a fresh round of austerity measures aimed at bringing the public deficit down to a eurozone limit of three percent of gross domestic product from 11.2 percent last year.

New York shares had dived on Monday on new eurozone fears, with the Dow Jones Industrial Average losing 1.24 percent.

"Wall Street collapsed in the final few minutes of trade last night as fears of all-out war on the Korean peninsula combined with concerns that European banks — notably those in Spain — may be staring into something of an abyss," said IG Index analyst Ben Potter.

"Certainly the realisation of two highly significant, yet totally unrelated events like this, could equate to something akin to financial Armageddon and with this in mind, the expectation has to be that traders will remain highly cautious in the near term."

In foreign exchange trade on Tuesday, the euro sank as low as 1.2218 dollars in early trade as the US unit attracted investors hunting for a safe-haven.

It later pulled back slightly to stand at 1.2237, which compared with 1.2349 dollars late on New York on Monday.

"The single currency continues to be weighed down by concerns about sovereign debt across the eurozone, as well as the health of the European banking system," said CMC Markets analyst Michael Hewson.

"The US dollar is also gaining support from concerns about rising tensions in South and North Korea as \’sabre rattling\’ by the North Koreans sends investors defensive."

The fresh eurozone worries come amid a huge crisis in Athens. Greece last week received billions of dollars in bailout money to help it pay off its debt obligations and avoid a crushing default.

But it added to fears that a trillion-dollar package agreed by the eurozone and International Monetary Fund earlier this month might not be enough to avoid a meltdown elsewhere in the eurozone.

In commodity markets, world oil prices fell sharply on Tuesday as persistent concerns at the eurozone reversed recent gains, pushing the market back underneath 70 dollars a barrel, traders said.

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