Eurozone crisis at its peak, investors rush to safe havens

Anxiety over uncertainty in global financial markets once again spooked the Indian bourses as the benchmark S&P CNX Nifty nosedivied by a hefty 87 points at the National Stock Exchange (NSE) on Monday.

Financial markets worldwide suffered a jolt over mounting concerns about debt crisis in Spain and amid worries about slowing Asian economic growth, reviving fears that the global economy is heading back into recession. European markets ended sharply lower and the Greek market ended with nearly 7% losses overnight.

On Tuesday too Asian shares were capped after the previous day’s deep losses as a surge in Spain’s borrowing costs, to levels seen as unsustainable, triggered alarms indebted regions could push the eurozone’s fourth-largest economy to seek a bailout.

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Investors were also disappointment with provisions of a bailout plan for Spanish banks approved by eurozone ministers. For now, liability for the package, which is expected to total as much as 100bn ($123billion), remains with the Spanish government.

The euro was not far from a two-year low against the dollar and a near 12-year low against the yen, as the single currency was undermined by Moody’s Investors Service changing its ratings outlook to negative for Aaa-rated Germany, the Netherlands and Luxembourg amid Europe’s ongoing debt crisis. Japanese market was losing the most as yen strengthened.

Even Brent and US crude posted their biggest one-day percentage losses since June 21 on Monday after Spain’s central bank said that country’s economy sank deeper into recession in the second quarter.

“There are fears this could be the beginning of a domino effect, which ultimately leads to Spain having to join Greece, Portugal and Ireland in asking for an official rescue,” Carsten Fritsch, an energy analyst at Commerzbank in Frankfurt, told Reuters.

From the precious metals space, safe-haven bids help gold outperform equities and commodities. Gold prices came off its lows and it is currently around $1,576 an ounce.

With market sentiment so fragile, the HSBC China July flash PMI due to be released today could set the tone for risk appetite as investors look for signs of a stabilisation in the slowdown in China. Eurozone’s manufacturing data is also due later on Tuesday.

Fears about Spain possibly needing a fully-fledged bailout, intensified investor flight to safety and pushed US treasury yields lower.Lyn Graham-Taylor, fixed income strategist, Rabobank told CNBC-TV18 that Spain’s demand for an additional bailout package was expected as it became clear that the Spanish bank bailout funds would stay on the sovereign balance-sheet for the foreseeable future. Taylor added that the fall of the Euro against the Yen is a sign of investors seeking havens of certainty as the crisis in the eurozone worsens.

Andrew Wilkinson, chief economic strategist at Miller Tabak & Co in New York, said the flattening of the Spanish yield curve reflected how investors have grown increasingly concerned about perceived risks facing Spain.

“Rising yields are in turn adding to a sense of crisis: If the regions ask for cash, how will the government fund itself? The brave Spanish matador appears to be pinned to the perimeter fence by the angry bull,” Wilkinson told Reuters.

Spain faces a crucial litmus test later today with its debt sale of 3 billion euros in 3- and 6-month bills.

In addition, the uncertainty over whether Greece could convince creditors to renegotiate rescue payments compounded fears Madrid’s funding crisis could accelerate after Spain’s central bank said on Monday the economy sank deeper into recession in the second quarter.

“If Greece doesn’t fulfill those conditions, then there can be no more payments,” German Vice Chancellor Philipp Roesler has said, adding that he is very skeptical about rescue efforts towards Greece and that the prospect of its exit from the monetary union has long ago lost its terror.

A German media report over the weekend said that the International Monetary Fund (IMF) may cut off aid to Greece. The report suggested that additional support required for Athens could range from 10-50 billion.

Domestically, political developments, monsoon worries and setback to reform process after Samajwadi party, an outside supporter of ruling UPA, opposed FDI in multi-brand retail also dampened the overall market sentiment.

Agencies