European markets hit 16-month low as banks falter, Greek stocks plunge

 Traders work at their desks in front of the German share price index, DAX board, at the stock exchange in Frankfurt, Germany.
Traders work at their desks in front of the German share price index, DAX board, at the stock exchange in Frankfurt, Germany.PHOTO: REUTERS

LONDON (REUTERS) - European stocks fell to a 16-month low on Monday (Feb 8), extending the previous week's hefty losses, with cyclical sectors such as banking and automobiles bearing the brunt of a broader sell-off.

The FTSEurofirst 300 index of top European shares fell 2.5 per cent to 1,250 points by 1252 GMT, its lowest intraday level since October 2014. Equity benchmarks in Germany, France and Spain dropped at least 2.8 per cent.

Bank shares crashed on the Athens stock exchange, losing a fifth of their value within hours, as the government was seen facing an impossible choice between further austerity and social unrest. The FTSEB index of financial stocks was down over 20 per cent in midday trading, helping pull the overall market index more than 7 per cent lower. The Athens stock exchange had already lost 8.89 per cent of its value last week, with the banking index taking a beating with a drop of 24.3 per cent.

Greece last week wrapped the first phase of a fiscal review by its EU-IMF international creditors, with no agreement in sight on a controversial pension reform that has caused a social backlash against Prime Minister Alexis Tsipras' fragile coalition. Leftist daily Avgi, which is close to the government, on Sunday said there were "many and significant" difficulties in reaching an agreement on Greece's fiscal targets for 2017 and 2018. These include a gap of 800 million euros (S$1.26 billion) and disagreements over how to handle the mountain of bad loans weighing down Greek banks.

Europe-wide, the STOXX Europe 600 banking index, down 3.6 per cent, was among the top decliners. The index is down more than 22 per cent so far this year on concerns about banks'earnings and profitability in a negative rate environment.

The cost of insuring the European financial sector's senior debt against default also climbed to its highest level since late 2013.

Shares in Deutsche Bank, Commerzbank, Credit Suisse, HSBC and BNP Paribas fell 3.5 to 6.3 per cent.

"Concerns are increasing that in a climate of negative interest rates and prolonged dovish monetary policy, banks'profitability will be squeezed," Jaisal Pastakia, investment manager at Heartwood Investment Management, said.

"Weak investor sentiment has been accentuated by the Bank of Japan's decision to apply negative interest rates on excess reserves, which follows moves already taken by the European Central Bank, Sweden and Denmark. A high level of unprofitable loans on banks' balance sheets impacts the broader economy by stifling both domestic demand and bank lending growth."

Earlier this month, Credit Suisse reported its first full-year loss since 2008 after booking a big impairment charge at its investment banking business, while Deutsche Bank posted a record loss for 2015.

Energy stocks also lost ground, with the European oil and gas index felling more than 3 per cent after crude oil prices slipped again after earlier gains.

Other European sectors sensitive to macroeconomic activities, such as autos, media, construction and technology, also fell 3.4 to 4.1 per cent.

Data over the weekend showing China's foreign reserves fell for a third straight month in January, as US dollars were dumped to defend the yuan and curb capital outflows, did nothing to calm investors. Though the fall was less than some had feared, it was the second biggest on record.

That followed a mixed US jobs report on Friday that had sent stocks on Wall Street lower.

Crude oil futures skidded over 2 per cent to just over US$33 by 6:15pm Singapore time, as a meeting between Opec producers Saudi Arabia and Venezuela provided little indication that steps would be taken to boost prices. Earlier, oil had gained as much as 1 per cent on hopes that an agreement would be reached to curb supply.

A launch by North Korea of a long-range rocket carrying what it called a satellite also sparked concern and drew international condemnation.

Earlier, Asian shares had pared losses as a weaker yen helped Japan's Nikkei snap a four-day losing streak, though trade was thin with many regional markets closed for the Lunar New Year holiday.

MSCI's broadest index of Asia-Pacific shares outside Japan was down 0.1 per cent, with Australian shares slipping a few points to end nearly flat.

But Japan's Nikkei erased early steep losses as the dollar gained on the yen, and ended up 1.1 per cent.

Singapore, Hong Kong and mainland China were all closed for the new year holiday. China, a focus of recent market concern, will be closed for the entire week.

Beijing has been struggling to underpin the yuan, which faces depreciation pressure as China's growth rate slows to its lowest levels in a quarter of a century.

"The Chinese currency is under quite notable market pressure and that requires quite active intervention from the authorities," said Bank of Tokyo-Mitsubishi UFJ currency economist Lee Hardman in London. "That poses downside risk to Asian currencies and the Aussie, which is seen as the China proxy."

The US non-farm payrolls report on Friday showed an increase of just 151,000 jobs last month, short of expectations for a rise of 190,000.

But the unemployment rate fell to 4.9 per cent, the lowest since February 2008, and wages rose, indicating some underlying strength in the labour market despite the weak headline figure .

Weak US economic data recently has led investors to pare back their bets on steady interest rate increases by the Federal Reserve.

Speculators slashed bullish bets on the US dollar for a sixth straight week through Feb 2, as net longs fell to their lowest level since roughly the third week of October, according to Reuters calculations and data from the Commodity Futures Trading Commission released on Friday.

The dollar index, which tracks the greenback against a basket of six major rivals, fell 0.2 per cent on Monday to 96.841, approaching a trough of 96.259 plumbed last Thursday, its lowest since October.

The yen, which is typically bought at times of risk aversion, gained 0.1 per cent against the dollar to trade at 116.68.