Economy slowdown, bank stress test in focus

Economy slowdown, bank stress test in focus

London: New evidence that the US economic recovery is slowing pushed investors to sell shares on Wednesday following a burst of bargain hunting the previous day.

Wall Street also looked set for a weak start.

European shares, however, came off their lows after two banking sources in Germany told Reuters that stress tests for European banks will not include changing the repayment commitments of German sovereign bonds.

Sovereign bonds of troubled Portugal, Italy, Ireland, Greece and Spain would see significant stress tests, the sources said.

Sentiment globally was hurt by the Institute for Supply Management’s reading on US service sector activity on Tuesday which showed growth in June, but at its slowest pace since February, heightening concerns about sluggish economic recovery.

Along with continued worries about euro zone sovereign debt, the slowing pace of recovery, particularly in the United States, has deterred investment in riskier assets.

World stocks as measured by MSCI were down half a percent having gained 1.7% on Tuesday. The Thomson Reuters global stock index was down 0.3%.

“The continuous stream of disappointing economic data recently has been feeding the markets’ worries about the adequacy of underlying demand in the world when the fiscal stimulus gets withdrawn," said Bernard McAlinden, investment strategist at NCB Stockbrokers in Dublin.

Investors are concerned about the impact of stimulus programmes running their course, governments introducing harsh spending cuts to combat burgeoning debt, and the eventual raising of interest rates.

In Europe, the FTSEurofirst 300 was down 0.6% having earlier lost around 1%. It closed up 2.6% on Tuesday, its biggest daily gain in about 5-1/2 weeks.

Earlier, Japan’s Nikkei ended down 0.6% but the index remained above a seven-month low hit on Tuesday.

Euro Slips

The euro slipped off a seven-week high with eyes on the European stress tests.

Analysts said the euro was nonetheless being supported after a solid sale of Spanish syndicated debt in the previous session.

“There’s still an awful lot of uncertainty in Europe and the stress tests are the next big event ... If growth concerns return then Europe will be worse hit than the US," said Derek Halpenny, European Head of Global Currency Research at BTM-UFJ.

The euro eased 0.2% to $1.2596, of its session lows. It had risen to $1.2663 on trading platform EBS on Tuesday, the highest in about seven weeks.

The dollar was up 0.1% against a basket of currencies.