9 July 2010
European markets concerned about sovereign debt European markets concerned about sovereign debt
European markets endured another challenging month as worries about some countries’ indebtedness continued unabated, accompanied by widespread concerns that stringent austerity measures imposed by governments might hold back economic recovery.
Investors’ concerns over prospects for recovery were compounded by fears of another credit crunch, as Europe’s debt crisis has made the region’s banks increasingly reluctant to lend to one another. “Stress tests” on the region’s banks have been performed and will be published in due course.
Although the criteria for the tests are currently unknown, the decision to publish was welcomed by shareholders. Nevertheless, some banks complained that, unless the region’s governments pledge financial assistance to weaker institutions, publication of the tests’ results might ultimately damage confidence in the banks.
The end of the month saw sharp falls in share prices and the value of the euro amid concerns banks might not be able to repay hundreds of billions in emergency loans to the European Central Bank (ECB) by a 1 July deadline. Nevertheless, as June ended, the ECB announced it would lend a lower-than-expected amount to the banks, and this news cheered investors, as it suggested the eurozone’s financial sector might be in better shape than previously thought.
The euro endured a torrid month amid ongoing concerns over possible defaults by some highly indebted countries within the eurozone. Nevertheless, the weak euro is making the region’s exports more attractive to countries outside the region. According to the EU’s statistics office, exports in the eurozone rose by 2.5% during the first three months of 2010, compared with growth of 1.7% in the previous quarter.
That said, it is worth remembering that Germany, the eurozone’s largest economy, relies heavily on demand from its fellow eurozone members for its exports. Indeed, investor confidence plummeted in Germany during June as investors became increasingly worried that the European debt crisis would hamper growth in exports and the German economy.
The ECB maintained interest rates in the eurozone at 1% during June, and the bank’s president Jean-Claude Trichet warned that growth would be “uneven”. Lower government spending and higher taxes in the region are likely to avert any risk of excessive inflationary pressure, allowing the ECB to retain its relatively loose monetary stance.
Demand for European equities during the month was low while Europe excluding UK was one of the worst-selling IMA sectors in terms of net retail sales – surpassed only by Asia Pacific excluding Japan.
