European stock markets collapsed Thursday, with financial shares leading the losses after the Federal Reserve's pessimistic view on the U.S. economic outlook overshadowing the central bank's latest attempt to bolster the world's largest economy.
London's FTSE 100 had recently tumbled 4% to 5074.93, the DAX in Frankfurt slid 4.3% to 5200.93 and the CAC-40 in Paris also slumped 4.4% to 2808.59.
The Fed Wednesday highlighted "serious downside risks" facing the U.S. economy, which sparked a bout of risk aversion across U.S. and Asian markets overnight. On Wall Street, the Dow Jones Industrial Average tumbled 1.3% to 11260. In Asia, Japan's Nikkei Stock Average fell 2% and Hong Kong's Hang Seng Index shed 3.7%.
The Fed said it will increase its share of longer-term Treasurys by $400 billion by June 2012 by selling shorter-dated holdings, a program dubbed "Operation Twist." The program aims to lower long-term borrowing costs and boost an ailing economy. But investors have been left broadly disappointed that there was no surprise announcement of a third round of quantitative easing, and questioned the effectiveness of "Operation Twist".
The intention is that borrowing costs are lowered for businesses and households, via the decline in longer-dated Treasury yields. "This is no panacea though," said economists at FxPro. "The U.S. 10-year is already at 1.80%, so the downside is starting to look limited and short-term borrowing costs could well increase."
Banking balance sheets will be further strained as the spread from borrowing short-term and lending longer-term is diminished, FxPro's economists added. "As such, it could well be that the fall in Treasury yields [presuming it happens] is not fully reflected in corporate and mortgage rates, as banks try to maintain profit margins. In sum, it's a step in the right direction, but it probably won't be enough to kick-start the economy," they said.
It was financial stocks that posted some of the steepest losses, further stung by Moody's Investor Service downgrading three top U.S. banks—Bank of America, Wells Fargo and Citigroup—saying its move was based on the U.S. government being less willing than before to rescue them if they become unstable. The Stoxx Europe 600 banks index lost 3.1% to 122.33.
At the same time, the pessimistic tone surrounding the global economy is weighing on commodity prices. Fears of a slump in global demand escalated in Asia overnight after a preliminary gauge of China's manufacturing activity contracted in September, re-igniting worries the country may further sap global consumption and demand. As a result, the Stoxx Europe 600 basic resource index lost 5.6%, while the equivalent sector for oil and gas stocks fell 3.5%.
Attention remains on Greece's debt negotiations with international lenders. Greece has pledged to do "anything" to stay in the euro zone and gain access to bankruptcy-avoiding loans, although unions announced new strikes against the painful austerity measures being imposed.
Strategists at Nomura said although the new Greek austerity measures makes a 'disorderly default' in coming days less likely, "the package does not address the underlying structural problems of Greek economy or reduce the need for a credible backstop to the euro-zone crisis and thus we don't think that any positive sentiment will last."
Looking to Thursday's agenda, markets will be focused on the talks in Greece, together with a raft of economic data releases. In the U.K., the Confederation of British Industry will release industrial trends data at 1000 GMT. In the U.S., weekly jobless claims are at 1230 GMT, while house price index and leading indicators data releases are both due at 1400 GMT. There will also be euro-zone consumer confidence data at 1400 GMT.
In the currency markets, the euro was lower after the dollar gained following the Fed's announcement. The common currency was recently at $1.3530 from $1.3570 late Wednesday in New York, and at ¥103.47 from ¥103.77. The dollar was at ¥76.48, from ¥76.43.
Oil prices lost ground, with November Nymex crude oil futures down $1.67 at $84.25 a barrel. Spot gold was at $1,774.80 a troy ounce, down $33.30 from its New York close Wednesday. In the European sovereign debt markets, the switch out of risky assets saw the key December German bund contract push up 0.65 at 138.48.
read more: Olympus Wealth Management
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