European stocks dive on worries

Markets fall across the continent, as a full-blown correction takes hold.

By Charley Blaine May 7, 2010 1:32PM
A rocky week ended badly in Europe. And don't expect the volatility to subside much next week. European markets are in a major correction, and it's not clear when they will bottom.

European stocks were battered by riots in Greece, worries that Greece's debt problems would spread across the continent and political uncertainty in the United Kingdom. Britain's Conservative Party was unable to win a clear majority in Parliament, and a struggle is under way to form a coalition government.

To complicate matters, there is a Sunday election in the German state of North Rhine-Westphalia. This is Germany's most populous and economically most powerful state.

If the ruling center-right coalition in North Rhine-Westphalia loses, Prime Minister Angela Merkel's coalition could lose its majority in the upper house of parliament. Such a change would crimp her ability to govern decisively.

The FTSE 100 Index ($GB:UKX) dropped 138 points, or 2.6%, to 5,123. Germany's DAX Index ($DE:DAX) fell 193 points, or 3.3%, to 5,715. France's CAC 40 ($FR:PX1) slumped 164 points, or 4.6%, to 3,393.

For the week, the FTSE 100 was off 7.8% and is down 5.4% for the year. The DAX fell 6.9% and is off 4.1% for 2010. And the CAC 400 was off 11.1% and has fallen 13.8% this year. DAX Index of German

The Stoxx Europe 600 Index, which tracks stocks across Europe, was off 3.9% to 237.18. It's down 12.8% since April 15 and is down 6.6% on the year.

"Anxiety is getting worse," Bob Parker, a London-based adviser to Credit Suisse Asset Management, told Bloomberg Television. "Markets are highly concerned about the contagion effect. There’s been nothing to calm market fears. At the (European Central Bank) press conference yesterday, there was no evidence of support for the European government bond markets."

If there was any good in the market, it was that the euro was actually flat against the dollar after falling all week. The euro was trading at $1.2641 at 1:15 p.m. ET. That was up slightly from Thursday. But it still is down 5.3% against the dollar this week alone and 11.8% this year. FTSE 100 Index

The problem for investors is that there is no clear solution to the crisis ahead.

The EU/International Monetary Fund aid plan has been greeted with less than enthusiasm by financial markets and is under threat from legal challenges in Germany.

The riots in Greece are showing the huge task ahead for the Greek government to meet EU demands for fiscal discipline.

Meanwhile, sovereign debt of other economies has come under fire. Ratings agency Moody's has warned that the rot could spread to the banking systems of Britain, Italy, Ireland, Spain and Portugal.

"It is very difficult to find a near-term equilibrium from a policy and markets positioning perspective," Andrew Bosomworth, a senior manager for bond fund PIMCO Europe, told Reuters.

The extent of the problem for investors can also be seen in a note from UBS, Reuters noted. The note addressed the question of whether market declines were now offering opportunities.

The short answer: no.

"The lack of a clear 'end game' for sovereign risk in Europe means that despite recent sharp declines in markets, this is not a buying opportunity," the note said.

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