Euro bourses slump on Portugal crisis

AFP/London

European stock markets fell yesterday, with shares in Portugal collapsing by almost 5% as the debt-plagued nation was gripped by a political crisis.

The falls had been far worse early in the session but shares recovered some ground after upbeat employment data out of the US and despite unfolding turmoil in Egypt.

“A better than expected US ADP employment report this afternoon as an aperitif for this Friday’s US employment report hasn’t been enough to placate investor concerns about the knock on effects for further political turmoil in both Egypt and Portugal, as well as a slowdown in China, sending European markets sharply lower,” said Michael Hewson, Senior Market Analyst at CMC Markets UK.

At close, Lisbon’s key PSI 20 index of leading shares plunged 5.31% lower to 5,236.49 points, following the resignation of two ministers over austerity policies.

In neighbouring Spain, Madrid’s IBEX 35 index nosedived more than 3% before recovering ground to close 1.56% lower to 7,743.80 points.

London’s FTSE 100 lost 1.17% to 6,229.87 points, Frankfurt’s DAX 30 slid 1.03% to end trading at 7,829.32 points and in Paris the CAC 40 shed 1.08% to close at 3,702.01 points.

In foreign exchange deals, the euro fell to $1.2923 - hitting a low last seen on May 29, but it later recovered to $1.3010 compared with $1.2978 late in New York on Tuesday.

Markets were rocked after Portugal’s Foreign Minister Paulo Portas resigned on Tuesday evening, even though his decision was not accepted by the prime minister.

This shock to the coalition government came one day after the sudden departure of Finance Minister Vitor Gaspar.

The political crisis in recession-wracked Portugal spread concern in world markets of a new wave of instability from the bailed-out nation on the eurozone’s debt-laden periphery.

The yield on benchmark 10-year Portuguese government bonds spiked above 8% for the first time since November 2012, hitting 8.023% before easing a little. It had closed at 6.720% the previous day.

A 10-year borrowing rate of about 8.0% is widely considered unsustainable for a country such as Portugal.

“Political turmoil in Portugal pushes the country’s 10-year bond yields to climb to 8.0% for the first time since November 27,” said ETX Capital trader Ishaq Siddiqi. “Two high profile ministers resigned from Portugal’s government over the past two days, triggering worries of instability within the government; and today, there are reports that more ministers are expected to step down as the country struggles to stay on top of its austerity plan.”

He added that the news would push the focus onto today’s interest rate gathering of the European Central Bank, and the subsequent press conference by its chief Mario Draghi.

“In light of these developments, the ECB’s policy meeting tomorrow (Thursday) in that case will be this week’s show stealer as the pressure is on Draghi to respond to the state of affairs in Portugal’s crumbling government,” added Siddiqi.

Adding to jitters were renewed concerns over the Chinese economy in the wake of downbeat data on the nation’s services sector.

Wall Street took turbulence in Europe in stride focusing on the first volley of jobs data before the unemployment report on Friday, with the Dow Jones Industrial Average rising 0.50% and the tech-heavy Nasdaq up 0.49%.

In the US, the ADP payrolls firm estimated that 188,000 private-sector jobs were generated in June, well above the May reading of 134,000.