European stocks fell sharply today as the euro debt crisis deepened amid violence in Athens and Madrid.
North American markets were much tamer, though down, and gold, oil and the Canadian dollar also slipped.
The violent protests yesterday in Spain, and today in Greece, where unions have called a 24-hour strike, are the latest against harsh austerity measures. Playing into the markets today is continued speculation over whether Spain, which is set to unveil new cutbacks tomorrow, will seek a full bailout, as well as Greece's push for cutbacks, which are tied to its bailout money and are being monitored by the so-called troika comprised of the European Commission, the European Central Bank and the International Monetary Fund.
"In Europe it's another day, another riot," said market analyst David Madden of IG in London.
"Last night it was Spain and today it's Greece, with Greek politicians caught between a rock and a hard place," he said in a research note today.
"Irate workers have taken to the streets to voice their opposition to the new round of state spending cuts. The government in Athens has just hammered out a deal to slash €12-billion from the budget; the cuts are harsh but essential if they want to get their hands on the next round of cash from the troika. Without more cash the Mediterranean nation could run out of funds in a matter of months."
London's FTSE 100, Germany's DAX and the Paris CAC 40 tumbled by between 1.6 per cent and 2.8 per cent, with the region's banks getting hammered. Spanish stocks fell by almost 4 per cent while bond yields spiked yet again, and Italian stocks lost more than 3 per cent.
Late yesterday, New York stocks soured after Charles Plosser, chief of the Federal Reserve Bank of Philadelphia, warned that the U.S. central bank’s latest asset-buying stimulus measure, dubbed QE3 to mark the third round of quantitative easing, might not work.
That’s still playing into markets today, but it’s the escalation of the euro debt crisis that’s really wreaking havoc.
To make matters worse, Spain's central bank warned of a deepening recession today, promising to exacerbate the social unrest in a country where one in four people can't find work and fully half the nation's young people are unemployed.
This, after Spain's Catalonia region threatened yesterday to secede and Standard & Poor's cut its outlook for the Spanish economy.
All of this has taken the shine off the measures unveiled earlier by ECB chief Mario Draghi and Fed chairman Ben Bernanke and his colleagues.
"For all the euphoria over Draghi's OMT and Bernanke's QE3, reality has bitten back hard today as markets have once again woken up to the political and economic realities of the policies being pursued in Europe," senior analyst Michael Hewson of CMC Markets said today in a report titled Tear gas and batons in Europe send markets sliding.
"Austerity protests in Spain last night have been followed by further protests and a general strike in Greece as population's tire of bearing the burden of spending cuts and tax rises against a backdrop of record unemployment and stagnant economies. Images of tear gas and rioting protesters on TV screens don't generally engender confidence in investors that EU leaders have control of the situation in Europe."
Tomorrow marks the beginning of two crucial days for Spain. First is the austerity budget, followed Friday by the release of a banking audit, which could indicate that the country's bruised banks need less than what has been earmarked by the euro zone rescue fund, said Ben May of Capital Economics.
"Not only would this be good news for the Spanish public finances, it would also leave the bailout facilities with more firepower to tackle the region’s other problems," Mr. May said.
"Spain’s troubles would be far from over, though," he said in a report.
"For a start, any structural reforms that are implemented would be unlikely to provide the economy with much of a near-term boost for some time. And since the government’s forecasts assume that the economy will contract by only 0.5 per cent in 2013 (we expect a 3 per cent fall) and the budget deficit is likely to be above target this year, we think that the government will need to eventually implement more austerity measures to meet its existing fiscal targets. Needless to say, more tax hikes and spending cuts would push the economy deeper into recession. Growing demands for more autonomy from Catalonia could also potentially have damaging repercussions for the Spanish public finances."
Source: The Globe and Mail