Sharp losses for European Indices on sovereign debt and growth concerns

European indices saw sharp losses of between 3% and 5% to start the week on a very negative footing as investors feared over global growth and a re-emergence of sovereign debt woes, specifically that of Greece, Spain and Italy.

The FTSE 100 lost 3.58% whilst deeper falls were suffered in Germany, where the DAX closed down by 5.2%, hitting a new 22-month low in the process. The Italian Mib lost 4.8%, marking a severely bad start to the week.

It has been a terrible start to the week in all honesty, with those anaemic US jobs figures from Friday still fresh in the memory, and this week we have already seen a marked increase in fears over a re-emergence and escalation of sovereign debt woes in the eurozone.

Last month was all about a potential slowdown in global growth but over the last few trading days we have had traders having to digest the Troika disagreement with Greece over the impact of a deeper recession on budget deficit targets, putting at risk the next tranche of bailout funds due soon. This along with the German election defeat which is threatening Angela Merkel’s eurozone resolve and speculation that Italian growth could also miss their 1.1% and 1.3% GDP growth targets for this year and next, though the any official downgrade may not cause too much of a surprise.

To add to this, we also have a planned nationwide strike looming in Italy as the Italian Senate votes on the €45.5 billion austerity package, which has been amended to such a form that many fear has created a significant fiscal shortfall that now threatens both ECB approval and medium term support, such as bond purchases which the European Central Bank had reminded the market is merely temporary. With ratings agencies keeping a close eye on proceedings, there remains significant concern that Italy is deeply locked in a sovereign debt crisis that has the potential to escalate further. As a result,the cost of borrowing also rose for Italy, with 10 year bond yields rising yet again, marking its longest sequence of gains since the inception of the euro.

It’s been a fairly sour taste to the new trading week with all risky asset classes sold off, with funds recycling into safe haven assets such as gold, which is threatening to break out to new record highs, having re-established itself at the $1900 level. The miners saw heavy selling, weighed down by a weaker services sector report this morning, which was the lowest on record.

UK banks in particular have been hit hard, along with European banking peers over sovereign debt but also on potential charges to come from US authorities on allegations of mis-selling US mortgage debt securities. Initial media suggests that costs to UK banks could total £5 billion, though in truth any number is mere speculation, whilst continued murmurs of an impending downgrade of UK bank credit ratings by Moody’s is also weighing on negative sentiment. Banks RBS, Lloyds and Barclays were the three heaviest fallers on the FTSE 100, losing 12%, 7% and 6% respectively.