MARKET COMMENT : Europe Stocks Tumble After Draghi Disappoints
08/02/2012| 12:39pm US/Eastern
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By Sara Sjolin
Heavy selling returned to Spanish and Italian stock markets on Thursday, after European Central Bank President Mario Draghi disappointed investors by failing to announce immediate steps aimed at bringing down borrowing costs for peripheral euro-zone countries.
The Stoxx Europe 600 index slumped 1.3% to 259.28, erasing an earlier gain. The index had gained ground leading up the ECB announcement, as hopes that the central bank would move toward nontraditional policy measures, such as a resumption of sovereign-bond buying, sparked a risk rally.
But at a news conference in Frankfurt, Draghi stopped short of announcing concrete measures, saying the ECB may "undertake outright market operations" once European governments have activated the region's rescue funds to buy government bonds.
Earlier in the day the ECB had kept its key lending rate at 0.75%.
Ahead of the news conference, expectations for bold steps were high after Draghi last week pledged to do "whatever it takes" within the bank's mandate to preserve the euro, fueling a risk rally. Market participants had widely interpreted the bold statement as an indication the bank was ready to undertake a round of Spanish and Italian bond-buying to control surging borrowing costs in those countries.
"This is a major disappointment. He's really playing with fire," said Christian Tegllund Blaabjerg, chief economist at FIH Erhvervsbank.
"After the rhetoric he used last week, he's out in a risky, dangerous game of losing credibility. Central bankers need to be credible because otherwise markets can't count on anything and will not react to policy action in the future," he said.
Stock markets erased gains and dropped sharply after the speech, with southern European stocks and bonds sharply pressured.
In Spain, yields on 10-year benchmark government bonds surged 44 basis points to 7.13%, according to electronic trading platform Tradeweb. A basis point is 1/100 percentage point.
Spanish stocks tanked, with the IBEX 35 index off 5.2% to 6,373.40, its second worst daily performance in almost a year.
Banco de Sabadell SA dropped 7.5%, Banco Popular Espanol SA lost 7.9% and heavyweight Banco Santander SA slumped 6.7%.
Italy's FTSE MIB index fell 4.6% to 13,282.55, weighed by Intesa Sanpaolo SpA sinking 9.6%
Yields on 10-year Italian government bonds rose 39 basis points to 6.30%, according to Tradeweb.
"Governments have been ready to activate the rescue funds for a long time. But they still need the procedures to get money out of the funds," Blaabjerg said. "Markets were largely expecting an activation of easing measures. Now we'll see a market correction over the next week."
Also on the central-bank stage, the Bank of England left its key lending rate at a record low 0.5%, in line with expectations.
The U.S. Federal Reserve also failed to meet investor hopes on Wednesday after a two-day policy meeting, as it refrained from activating stimulus measures to bolster the fragile economic recovery.
The central bank further downgraded its view on the economy but said it stands ready to act if needed.
In the U.S. on Thursday, jobless-claims data surprised to the upside, after applications for unemployment benefits rose less than expected last week. U.S. jobless claims rise 8,000 to 365,000
U.S. stocks were sharply lower on Wall Street.
Banks weighed on indexes in Europe.
BNP Paribas SA fell 4.1%, giving up a gain, after saying it completed 90% of its restructuring plan, while second-quarter profit dipped 13%.
Also in Paris, Credit Agricole SA dropped 8%, while Societe Generale SA lost 7.2%.
Veolia Environnement SA gave up 12% as first-half profit missed expectations, dragged by a 89 million euro ($109.1 million) write-down in Italy.
The CAC 40 index fell 2.7% to 3,232.46.
German banks also headed south, with Deutsche Bank AG losing 5.3% and Commerzbank AG dropping 6.2%.
The DAX 30 index fell 2.2% to 6,606.09, further weighed by BMW AG off 4.3%.
Meanwhile, Standard & Poor's affirmed its AAA rating on Germany and maintained a stable outlook.
In the U.K., Royal Bank of Scotland Group PLC declined 5.1%, as British government ministers consider fully nationalizing the bank, according to the Financial Times.
Lloyds Banking Group PLC fell 4.3%, while Barclays PLC slipped 3.6%.
The FTSE 100 index slid 0.9% to 5,662.30.
Smith & Nephew PLC gained 2.4% as it said it would raise dividends by 50% after more than doubling pretax profit in the second quarter.
Write to Sara Sjolin at AskNewswires@dowjones.com
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