Greece Drags Down European Stocks

By ISHAQ SIDDIQI

LONDON—European stock markets fell Thursday, as anxiety over Greece's debt situation, together with weak U.S. economic data, intensified contagion fears across Europe and fueled concerns about a slowdown in the U.S. economic recovery.
The Stoxx Europe 600 was recently 0.7% lower at 266. London's FTSE 100 Index fell 1% to 5683.38, Frankfurt's DAX slid 0.7% to 7057.32, while Paris's CAC-40 slipped 1.1% to 3765.34
Greece continues to shake global markets, as fears intensify over a default after protests against austerity measures turned violent in Athens Wednesday. Greek Prime Minister George Papandreou said he will form a new government Thursday and seek a vote of confidence from his parliamentary group after talks with opposition failed to form a unity government.
Risks are building as it gets ever more difficult to see the endgame for the Greek situation and it does seem that the next few weeks could mark the dramatic end to another chapter in the ongoing European debt story, said Deutsche Bank's strategist Jim Reid.
"We believe the period is resembling the build-up to the Lehman Brothers collapse where, although markets were increasingly nervous, virtually everyone expected a last-minute buyer. It's likely that the relevant parties are now more aware of the consequences post-Lehman, but there are more people that need to reach an agreement than there were during the last days of Lehman," added Reid.
This loss of confidence in equities pushed European government bonds higher as investors flocked to safety, with the September bund contract up 0.32 ticks at 126.27.
At the same time, the dollar and yen both gained against the euro, with the single currency at $1.4128 from $1.4177 late Wednesday in New York, and at ¥113.92 from ¥114.85. The dollar was at ¥80.62 from ¥80.97.
European banking stocks posted some of the biggest losses early Thursday, as contagion fears continued to push investors out of the sector, with worries mounting of bank exposure to Greek debt. The sector was still suffering on Wednesday's move by Moody's Investors Service to place the stand-alone financial strength ratings and long-term debt and deposit ratings of three French banking groups—Crédit Agricole, BNP Paribas, and Société Générale —on review for a possible downgrade. Shares in Credit Agricole lost 2.5%, while BNP fell 2.2% and SocGen slid 3.5%. For the sector as a whole, The Stoxx Europe 600 banks index fell 1.0%.
On top of the heightened concern in Europe, weaker-than-expected economic data out of the U.S. Wednesday caused further tension. Proof of slowing growth coupled with early signs of stronger-than-expected core inflation wasn't what the market needed, said IG Markets. "It added to the mounting evidence of a slowdown in the U.S. economic recovery and was reflected in the aggressive selling that hit Wall Street [on Wednesday]," it noted.
The Dow Jones Industrial Average sank 1.5% to 11892 in late trading, wiping out the week's gains, while the Standard & Poor's 500-stock index fell 1.8% to 1265.
A reading of the Federal Reserve Bank of New York's Empire State Manufacturing Survey fell below zero for the first time since last November, dropping 20 points from May to minus 7.79. The index dramatically disappointed economists' expectations of a reading of 12. Other data showed that industrial production remained weak, due to a continued fall in automobile manufacturing after the earthquake in Japan hit global supply chains. Separately, U.S. home builders' confidence also fell this month to its lowest point since last September, indicating that builders expect the weakening economy to further pull down their battered industry.
In Asia early Thursday, stock markets were lower after the sharp selloff on Wall Street. "Asia is following disappointing offshore leads," said Morgan Stanley investment adviser Shannon Briggs. "We've refocused on Greek debt and U.S. economic data, but the big question is whether the U.S. will have a double-dip recession. It's too early to tell."
Japan's Nikkei Stock Average fell 1.7%, South Korea's Kospi Composite declined 1.9%. China's Shanghai market was off 1.5%, while Hong Kong's Hang Seng lost 1.8%.
In commodities, spot gold was at $1528.40 per troy ounce, down $1.85 from its New York settlement on Wednesday. July Nymex crude oil futures were up 31 cents at $95.12 a barrel.
On Thursday's economic agenda, the U.K. publishes retail sales figures at 0830 GMT. In the euro-zone, harmonized consumer-price inflation together with employment figures for the first quarter, are due to be published at 0900 GMT. In the U.S., weekly jobless claims and housing starts are both due at 1230 GMT, followed by the Philadelphia Fed index at 1400 GMT.