European stock markets closed sharply lower yesterday after a much worse than expected US home sales report hit investors already nervous over the US and global economic outlook.
Dealers said the markets have been on the slide for several weeks on fears the economic recovery is in trouble and the latest data showing existing US home sales plunged 27.2 per cent in July to a 11-year low only added to worries.
Sales had been expected to fall around 12 per cent and prospects remain clouded for the US housing market, they said, adding that until stability returns there can be little hope of gains in jobs and confidence.
In London, the FTSE 100 index of leading shares closed down 1.51 per cent at 5,155.95 points. In Paris, the CAC 40 lost 1.75 per cent at 3,491.11 points and in Frankfurt the DAX dropped 1.26 per cent at 5,935.44 points.
Sharp gains in the yen to 15-year highs against the dollar and continued heavy purchases of bonds also showed investors increasingly looking to get into safer assets amid growing doubts over the recovery, dealers said.
Bond yields were at record lows around 2.16 per cent for the European benchmark 10-year German bonds in afternoon trade, showing how investors were prepared to accept very low returns in exchange for safety in troubled times.
A recent burst of takeover activity has helped the markets, providing several leads, but they serve only for a while until the underlying concerns come through again, they added.
“Equity markets are still nervous as investors factor in increasing signs of an economic slowdown in the United States,” said VTB Capital analyst Neil MacKinnon.
“In the near-term, there is the risk of further slippage in equity markets which can test the May/June lows,” Mr MacKinnon said.
Nigel Gault, chief US economist for IHS Global Insight, said the US home sales figures showed “no sign of any underlying recovery despite rock-bottom interest rates.”
In New York, the blue-chip Dow Jones Industrial Average was down 0.78 per cent at round 1600 GMT while the tech-rich Nasdaq Composite lost 0.85 per cent.
Dealers said that after the dire home sales, investors were bracing for Friday’s revised second quarter growth figures, expected to be cut from the initial 2.4 per cent to 1.4 per cent, even more sharply down from 3.7 per cent in the first quarter.
Elsewhere in Europe, Amsterdam fell 1.62 per cent, Brussels lost 1.32 per cent, Madrid was down 1.65 per cent, Milan shed 1.58 per cent and Swiss stocks dropped 1.05 per cent.
In Asian trade earlier yesterday, Tokyo lost 1.33 per cent to a 15-month low as investors were spooked by the government’s apparent unwillingness to intervene and push down the yen whose rise to 15-year highs is punishing exporters.
The dollar slumped to levels below 84 yen, last seen in mid-1995, sparking panic and calls for action.
“Personally, I don’t like the idea of foreign exchange intervention, but the government needs to act to stop market jitters,” president of the Tokyo Stock Exchange Atsushi Saito said.