The honeymoon period that followed last week’s euro deal proved all too brief, making way yesterday afternoon for a show of bitter disappointment from traders.
Stocks fell sharply, peripheral Eurozone economies saw their bond yields soar towards the “danger zone” again, and the euro dropped as investors fled risky assets once more.
Markets had risen last week as Europe’s politicians raised hopes that a solution to the crisis would be agreed by Friday, allowing countries to begin to plan how to pay down their huge debts.
Leaders pledged to enforce good fiscal behaviour on governments, stopping them running up large deficits and so preventing a similar crisis arising in the future.
But many traders were left unimpressed by a deal that threatened to come unwound almost as soon as it was agreed.
“Markets want a firm commitment either for Germany to stand behind the Eurozone’s debts or for the ECB to step up its bond purchases,” said Alex Lawson, financial risk manager at Moneycorp.
“Investors still seem in love with the euro, but it is beginning to slide and only concrete action will begin to halt or reverse that,” he added.
“Sooner or later the pain will become acute enough for Germany to do what the markets want.”
Germany’s DAX stock index fell 3.36 per cent yesterday, while France’s CAC 40 dropped 2.61 per cent and the FTSE 100 closed the day down 1.83 per cent. Investors also rushed out of peripheral bonds as fears that some countries cannot pay their debts resurfaced.
Yields on 10-year Italian debt hit 6.779 per cent at one stage, close to the seven per cent “danger zone” beyond which Greece, Ireland and Spain had to be bailed out, before falling back later in the day.
Spanish yields rose back above six per cent, hitting 6.069 per cent, before also edging down.
As a sign of investors seeking out safe havens, yields on 10-year UK gilts fell to a fresh low of 2.07 per cent, before rising slightly to 2.102 per cent. The euro fell 1.496 per cent against the dollar to $1.32. Sterling, too, rose 0.94 per cent against the euro.
US stocks were also not immune to the spreading panic, with the Dow sinking more than 200 points during trading before recovering slightly to close down 1.34 per cent.
And shares in Commerzbank plunged 7.8 per cent yesterday after reports that the beleaguered bank was in talks over a government bailout – a plan the firm denied.
Fears have been growing in recent weeks over the German lender, which must raise more than €5bn to meet capital requirements by mid-2012.