Paris: European stocks dropped early on Friday, extending their week-long slide as US lawmakers failed to break a deadlock over raising the debt ceiling, fuelling fears of a default by the world’s biggest economy.
Investors’ risk appetite was also dampened after a string of disappointing corporate results and as Moody’s placed Spain on review for a possible downgrade due to weak growth and funding pressures, hitting the euro .
At 2:30pm, the FTSEurofirst 300 index of top European shares was down 0.5% at 1,083.72 points. The benchmark index has lost nearly 3% so far this week.
The euro zone’s blue chip Euro STOXX 50 index was down 0.8% at 2,670.77 points.
French water and waste group Veolia Environnement sank 7.8% after warning it will miss a profit growth target this year, while power network equipment maker Schneider Electric dropped 4% after saying the impact of higher raw material prices was much higher than forecast.
“We’re getting a lot of totally unexpected profit warnings from companies that were seen solid, and the market shows no mercy,” Kepler Capital Markets trader Patrice Perois said.
“The analysts’ forecasts are probably 15% too optimistic.”
US Republican leaders will try to rescue their budget deficit-cutting plan on Friday after House of Representatives Speaker John Boehner failed to get enough support for his plan on Thursday, fuelling fears that a deal won’t be reached before the 2 August deadline.
“People are rattled by the whole debt crisis from both sides of the Atlantic, while at the same time, charts show the indexes as not in oversold territory, so there is still room on the downside. This isn’t capitulation yet.”
Despite the week-long slide, the Euro STOXX 50’s 14-day relative strength index (RSI), a momentum indicator, was at 40 on Friday, with 30 and below considered oversold and 70 and above considered overbought.
The index’s next key support level looms at 2,608 points, which represents a near one-year low hit earlier this month.
Spanish stocks were under pressure on Friday following Moody’s warning, with the country’s banking stock index down 2.7%. The ratings agency also puts Spanish banks on reviews for rating cut.
VOLATILITY INDEX ON THE RISE
“Moody’s hasn’t really told us anything we don’t already know, but as long as debt issues in Spain, the euro zone and particularly in the United States remain unresolved, investors are going to be shaky,” a Madrid-based trader says.
Banco Santander was down 2.4% and BBVA dropped 2.1%.
Spanish debt yields rose while bund futures sharply rallied, and the Euro STOXX 50 volatility index -- Europe’s main barometer of anxiety -- was up 4.2% after flirting a with one-week high earlier in the session.
The index, based on sell- and buy-options on the Euro STOXX 50 stocks, has jumped 25% so far this week, mainly boosted by rising fears of a US debt default and credit rating downgrade.
“With all the major crises this year, from Fukushima to the sovereign debt problems, there’s a high level of pessimism on the market, and investors won’t come back en masse to equities until we get a quiet 9-12 month period,” said Matthieu Groues, chief investment officer at Lazard Freres Gestion, which has ¥11 billion under management.
“Banking stocks are very very cheap. These stocks could jump 20% and they would still look cheap. Even when you price in a 50% haircut on Greek, Portuguese and Irish debt and a 20-30% haircut on Spain and Italy, these stocks still look cheap,” he said.
Recently-hammered Greek shares bucked the trend on Friday, with the country’s benchmark ATG index up 0.6%, after a Greek finance ministry official told Reuters China could provide loans to Greece to fund government bond buybacks in the secondary market to help shrink the country’s debt burden.