Global markets tumbled yesterday as investor angst over the euro zone returned with a vengeance, triggered by concerns Spain may be unable to avoid a full-blown sovereign bailout.
Nervousness was also reflected in the euro's retreat to its lowest level in more than two years and Spanish bond yields soaring to their highest point since the launch of the single currency.
"Investor attention is beginning to refocus more intently upon developments in Europe again after a brief period of calm," said Lee Hardman, a currency analyst at Bank of Tokyo-Mitsubishi UFJ. "The European authorities are still failing to at least stabilise investor confidence in euro-zone sovereign debt."
Markets in Asia yesterday started the sell-off in equities.
Hong Kong's Hang Seng index was the biggest loser in the Far East, closing 2.99 per cent to 19,053.47 points.
In the UAE, the Dubai Financial Market General Index lost 1.48 per cent to 1,493.36, and 0.12 per cent was shaved off the Abu Dhabi Securities Exchange General Index, as it closed at 2,468.80.
In Europe, all the major indexes were down during afternoon trading, with the FTSE Eurofirst 300, grouping Europe's largest stocks, down 2.35 per cent.
The euro fell below the US$1.21 barrier to about $1.2095 and slid close to a near 12-year trough against the yen.
Commodities also felt the brunt of the sell-off as investors worried the euro crisis will stem demand for energy and construction materials. European Brent crude fell $3.43 to $103.40 a barrel in trading. Brent had reached a fourth straight weekly gain in trading on Friday. Copper hit a three-week low of $7,367.75 per tonne on the London Metal Exchange.
Fuelling the latest "risk off" actions were reports over the weekend suggesting six more Spanish regions would ask the central government for financial help, following Valencia making such a request on Friday.
Jitters were already lingering after a poor bond auction in Spain last week. Ten-year Spanish government bond yields yesterday moved to a fresh euro-era high of 7.59 per cent.
The Spanish economy minister Luis de Guindos maintained the country would not need to request a full sovereign aid package similar to those taken by Greece, Ireland and Portugal. A bailout of Ä100 million (Dh443.9m) has already been approved to help the banking system.
But observers disagree with Mr Guindos. "This continued escalation in yields has left Spain looking more and more like it will require a sovereign bailout," said analysts at Rabobank.
Rick Pudner, the chief executive of Emirates NBD, said events in the euro zone, along with economic uncertainty in the United States and signs of slowing growth in emerging markets, meant the macro outlook for the remainder of this year was challenging.
"The fallout from the euro zone is unclear," he added. "We are still watching Spain and further kicking of the can down the road in the euro zone."
The flight to perceived safety in the euro zone was highlighted at a German debt sale, where investors paid the government to buy its debt. Germany sold Ä2.7 billion of 12-month treasury bills at an average yield of minus 0.054 per cent.
With the euro-zone crisis now rumbling into its fourth year, fresh evidence of the uphill challenge facing policymakers in reviving their beleaguered economies emerged yesterday.
The debts of euro-zone governments rose to record levels in the first quarter, data from the European Union's official statistics agency Eurostat showed.
The ratio of government debt to GDP of the 17 euro-zone countries grew to 88.2 per cent at the end of March, rising from 87.3 per cent at the end of last December, the data showed. Funds lent between countries of the single currency bloc were not included in the data.
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