European stock markets closed mostly lower in volatile trade yesterday as nervous investors waited for key bank stress test results in the hope they will show some light at the end of the debt tunnel.
Dealers said that with growing fears the eurozone debt crisis could snag Italy and Spain after Greece, Ireland and Portugal, sentiment took another knock as the ratings agencies put the United States in the firing line as well.
The stand-off between President Barack Obama and his Republican opponents on agreeing a new debt ceiling is worrying but there is a political imperative for both sides to compromise and the situation is not the same as in Europe.
They said the immediate concern yesterday was the European Banking Authority stress test results, announced after the close, which showed eight failures out of the 91 banks reviewed.
The EBA said the failed banks would need €2.5 billion in additional capital to bring them up to strength – a small sum compared with the massive amounts needed to bolster the eurozone and stave off default for Greece.
Critics have noted that the tests, while more severe than last year’s exercise, did not include the possibility of a sovereign default and so were not as tough as they should have been given Greece’s immediate problems.
In London, the benchmark FTSE 100 index of top shares closed down a fractional 0.06 per cent to 5,843.66 points. In Frankfurt, the DAX edged up 0.07 per cent to 7,220.12 points while in Paris the CAC 40 fell 0.66 per cent to 3,726.59 points.
Other European markets showed modest losses but Milan shed 1.02 per cent and Madrid was off 1.12 per cent, reflecting the increased concerns over Italy and Spain.
In Paris, Yves Marcais at Global Equities said the debt crisis and the risk of contagion remained the main concerns in Europe.
“This lack of visibility on Europe’s future dominates sentiment and makes investors extremely cautious,” he said.
“Though undoubtedly attention grabbing, that the tests do not include the scenario of a sovereign default leaves them toothless to a large degree,” said analyst Michael Turner at RBC Capital Markets of the EBA findings.
In New York, the market was surprisingly buoyant, supported by strong results from Citigroup and Google which helped offset a sharp fall in consumer confidence and the debt impasse in Washington.
The blue-chip Dow Jones Industrial Average was up 0.13 per cent at around 1630 GMT while the tech-heavy Nasdaq Composite added 0.68 per cent.
Commerzbank analysts said in a note that “the market is currently focussing on the problems in the US. After all, it is easy to resolve the US debt problem – in contrast to the European difficulties.” They said increasing the US government debt ceiling “is a routine step and not necessarily problematic from an economic point of view”.
More concerning, a sharp fall in US consumer confidence “casts doubt over our hope of a rebound in consumption growth in the third quarter”, noted Paul Dales at Capital Economics.