European equities fell sharply in morning trade on Friday, tracking losses in US and Asian markets as investors were gripped by fears of a credit freeze in the global financial system.
The downturn came as the European Central Bank intervened to calm jittery markets for a second day. The central bank lent €61bn to financial institutions for use over the weekend. The ECB said it received bids totalling €110bn but decided to lend just €61bn after setting an average rate of 4.08 per cent, just above its main interest rate of 4 per cent. On Thursday the bank injected an unprecedented €95bn into money markets in an effort to stabilise sentiment.
”Central banks are not supposed to be tightening credit when markets are in complete disarray,” said John Richards, head of Asia-Pacific Strategy at RBS Securities. ”And this is close to a complete disarray.”
By late morning on Friday, London’s FTSE 100 shed 3.2 per cent or 200 points to 6,071.6. The pan-regional FTSE Eurofirst 300 was down 2.9 per cent to 1,481.84, Frankfurt’s Xetra Dax fell 1.6 per cent to 7,332.22, and the CAC 40 in Paris lost 2.9 per cent to 5,461.46.
In the US, S&P 500 futures were down 17.5 points, Nasdaq futures were 20.5 points lower and those for the Dow Jones Industrial Average had fallen by 137 points.
Asian stock markets fell heavily after the Japanese and Australian central banks followed the ECB’s lead on Friday by intervening in their own markets. In Tokyo, the Nikkei 225 average closed at a 5-month low, down 2.4 per cent or 407 points at 16,764.09, while in Sydney, the S&P/ASX 200 suffered its heaviest daily fall since the attacks on the United States in September 2001, losing 3.7 per cent at 5,936.0.
“Risk aversion has returned to the market with a vengeance. Current sentiment is likely to continue with Dow futures down,” said Melinda Smith, an analyst at ABN Amro.
Government bond yields fell and short-term interest rate futures rose for a second day. The yield on the 10-year benchmark gilt was five basis points lower at 5.2 per cent, while interest rate future contracts were up as much as eight ticks.
In the derivatives market, the cost of insuring €10m of high-yield European corporate debt against default increased to €365,000 as concerns about the lack of liquidity in the market unsettled investors.
In the equity markets financial stocks once again suffered the heaviest losses as investors steared clear of a sector that has heavy exposure to the US subprime mortgage market through collaterised debt products.
Deutsche Bank became the latest European bank to reveal it had suffered heavy losses in one of its funds. The DWS ABS fund, which invests in asset-backed securities, had suffered outflows totalling around 30 per cent in the last week. The bank said that despite the drop in the value of the fund from €3bn to €2.1bn it would not hold redemtions. Deutsche Bank shares fell 5.4 per cent at €92.80.
BNP Paribas, which on Thursday suspended three of its funds because of losses linked to securitised debt products, lost 4.7 per cent at €78.70 in Paris.
In the UK Man Group was one of the heaviest fallers as rumours mounted that the world’s larged listed hedge fund could pull its upcoming US initial public offering due to uneasy credit conditions. The shares shed 6.6 per cent at 492p.
Dutch takeover target ABN Amro fell 5 per cent to €33.33 on concerns that Fortis will struggle to raise the €24bn in order to finance its part of the €71bn deal along with Royal Bank of Scotland and Santander. RBS is holding an EGM in Edinburgh on Friday to vote on its offer for the Dutch bank.
Shares in Fortis were down 3.5 per cent to €26.80 and RBS fell 5.4 per cent to 554p. Rival bidder Barclays lost 5.4 per cent at 644½p amid talk that it may withdraw its offer altogether.
The world’s biggest mining company, BHP Billiton, was 4.9 per cent down at £12.84, with competitor Rio Tinto losing 3.8 per cent at £30.82 and platinum mining group Lonmin 2.8 per cent lower at £31.79.
Old Mutual lost 4.2 per cent at 155p after it reported a 12 per cent fall in first-half operating profit at £782m due to weak the rand and dollar. The British and South African insurer, whose shares have been hit by concerns over subprime exposure, said on Friday that its exposure was tiny, representing just 4 per cent of its US assets.
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