Market rally loses steam

City A.M. Reporter
GERMANY’S cabinet yesterday approved the biggest national contribution to the emergency package intended to stabilise the euro, as global markets sobered up after Monday’s euphoric rally.

Relief at the European Union’s bold move to restore investor confidence gave way yesterday to doubts whether weaker Eurozone economies can meet their part of the bargain and deliver drastic budget cuts, driving the euro and stocks lower.

The 16-nation single currency, which surged to nearly $1.31 Monday, fell below $1.27 yesterday, as traders wondered whether the bailout package will do little more than buy European countries time to deal with their fiscal deficits.

The decision by the European Central Bank to start buying Eurozone government bonds was also seen as potentially compromising the central bank’s independence.

The emergency plan, the biggest since G20 measures following the collapse of Lehman Brothers in 2008, sparked a spectacular rally in world stocks and the euro on Monday.

But stock and bond markets fell in Asia, Europe and the United States yesterday, with investors concerned that the plan was not a long-term solution to problems plaguing the 11-year old single currency area. The FTSEurofirst 300 index of leading European stocks ended down 0.4 per cent after gaining 7.0 per cent Monday. The Dow Jones industrial average fell 0.34 per cent, to 10,748.26.

EU Economic and Monetary Affairs commissioner Olli Rehn said Portugal and Spain, next in the market firing line after Greece, must cut their deficits this year. He also raised pressure on Italy, which has the Eurozone’s highest debt after Greece, and France, with a heavy structural budget deficit, to do more to improve their public finances quickly.