World stocks tumble as bank funding worries intensify

Reuters | Tue Jun 29, 2010 | 5:29pm IST

World stocks hit a 2-1/2 week low on Tuesday while oil and the euro tumbled as investors fretted over the funding situation of banks about to repay 442 billion euros ($545.5 billion) to the European Central Bank. Banks must repay on Thursday money borrowed a year ago at rock bottom rates, leaving a potential liquidity shortfall in the financial system of more than 100 billion euros. The ECB holds a three-month tender on Wednesday that many in the market expect will be tapped as banks scramble to pay back the one-year funds. Expectations are that 210 billion euros will be allotted at the offer. The state of banks will become clearer when the details of bank stress tests are published next month.

Sources told Reuters on Monday that more than 100 banks in Europe will be examined in a second round of stress tests to gauge how well they can handle shocks to the financial system. Investors worry that the fragile banking sector may weigh on global growth, which is already showing pockets of weakness, especially in the euro zone. "There are still concerns about growth coming to a grinding halt and that the sovereign debt problems are much higher than we think," said David Buik, senior partner at BGC partners. The MSCI world equity index fell 1.2 percent while the FTSEurofirst 300 index lost 1.8 percent. Emerging stocks dropped by 1.8 percent. U.S. stock futures were down more than 1 percent, pointing to a weaker open on Wall Street later. Chinese stocks fell 4 percent to a 14-month low as investors started pulling funds from the market to prepare for a major initial public offering by Agricultural Bank of China, pointing to tight liquidity in China’s markets. 


The euro fell 0.7 percent to $1.2187 and hit record lows of 1.3250 against the safe-haven Swiss franc. The euro lost more than 1 percent to fresh 8-1/2-year lows of 107.83 yen. "Equity markets are weak, so there’s been a reasonably large reverse in risk-taking behaviour," said Daragh Maher, senior currency strategist at Credit Agricole. "It’s been an amplified reaction, due to limited liquidity, and it will be difficult to tell how far the selling will extend." The dollar rose 0.6 percent against a basket of major currencies. U.S. crude oil fell 2 percent after forecasts indicated tropical storm Alex would skirt the main production region in the U.S. Gulf of Mexico, limiting disruptions to a few precautionary shutdowns.


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