Stock exchanges finish week down after debt crisis springs back to life, Chinese growth hits three-year-low and weaker US data
A rough week wiped out all the gains enjoyed by Britain's blue-chip shares so far this year as the European debt crisis sprang back to life. A sharp slowdown in China's economic growth to a three-year low added to concerns, along with weaker data on the US economy. Eurozone shares also erased most of the gains made this year.
The FTSE 100 index in London finished the week down 58.67 points at 5651.79, a 1% drop on the day, having started the year at 5572.28. Banking stocks were the worst performers on Friday, with Barclays tumbling 3.8% to 214.9p. By London's close, Wall Street was down 0.6% while Germany's Dax and France's CAC fell by 2.4% and 2.5% respectively. A two-day rally was not enough to claw back the FTSE's 2.2% drop at the start of the choppy four-day week.
"The past week started as the previous one ended, with investors rushing out of peripheral government bond and European stock markets as concerns over the economic and political situation in the periphery rose," said Tobias Blattner at Daiwa Capital Markets.
Italy and Spain are now at the centre of the storm. Italian and Spanish government bond yields jumped this week amid heightened worries over the impact of drastic austerity measures on the eurozone's third- and fourth-largest economies.
The eurozone's blue-chip index, Euro STOXX 50, briefly fell below its 2012 opening level of 2315.75, but ended Friday at 2352.24, down 2.6%. Banking stocks were the biggest losers everywhere, with Italy's Unicredit plunging 6%. Wall Street banks JP Morgan Chase and Wells Fargo were not immune, despite reporting forecast-beating results for the first quarter.
"The underlying problem is the renewed concern that Europe hasn't fixed its problem," John De Clue, global market strategist at US Bank Wealth Management in Minneapolis, told Reuters. "People are not comfortable going into the weekend with a dark cloud."
Spain will test investors' confidence next Thursday when it sells new two- and 10-year bonds. The cost of insuring Spanish debt against default hit an all-time high – credit default swaps hit 500 basis points for the first time on Friday, which means it now costs $500,000 a year to buy $10m of protection against a Spanish default using a five-year CDS contract. Italian bonds broadly recovered the week's losses, with the 10-year yield at 5.53%, as tensions eased on hopes of more rounds of bond-buying from the European Central Bank.
However, two top ECB officials dampened such expectations after executive board member Benoît Cœuré, in charge of market operations, said on Wednesday that the central bank's Securities Market Programme was still in place, allowing it to buy up debt of struggling eurozone countries if needed. Klaas Knot, a member of the ECB's governing council, said on Friday he did not expect a repeat of the bank's three-year liquidity auctions, which pumped more than €1 trillion into the eurozone's banking system in December and February. He added: "I don't think we're heading towards the edge of a cliff. I think markets have over-reacted a bit."
Investors piled into safe-haven investments such as US and German government debt and gold, which notched up its biggest weekly rise since late February. Copper dipped to a near three-month low on the news that the Chinese economy had slowed.