European markets feel pressure amid fears interest rate trend set to turn

EUROPEAN markets closed significantly weaker yesterday, prompted by fears of a tightening interest rate outlook in the months ahead.

By close of business the ISEQ 100 Index was down by over 2% despite a strong rally in the key Irish bank stocks earlier in the day.

Reassurances by Finance Minister Brian Lenihan that NAMA would proceed on time saw gains of 10% and nearly 7% in Bank of Ireland and AIB respectively.

BOI was up at 2.01 by early afternoon trading, a jump of 10% while AIB was ahead 6.9% at 2.08.

As the afternoon wore on fears that interest rates would harden in the coming months hit sentiment and markets across the globe all lost ground.

Dolmen Stockbrokers blamed global concerns that key central bankers meet next week, including the US Federal Reserve, the ECB and the Bank of England, when the future of bank rates will be very much a hot topic.

With global sentiment improving, fears are growing that the historic low interest rate regime of the past 18 months is drawing to a close, Dolmen said.

The fact that it was the end of the month also spurred some traders to cash in gains on the month.

The net result was London’s FTSE 100 closed down 1.8% to 5,045, Frankfurt’s DAX lost 3.1% to 5,415 while the Paris CAC 40 was off 2.9% at 3,608.

Also in the US this week concerns have risen about the solvency of other financial institutions, including Cit Group (sic), a key lender to small and medium businesses in the US. Its market capitalisation is down to about $300m but the fact that it could go bankrupt has raised fears of another round of banking failures, he said.

More than 100 banks have gone bankrupt in the US and while the economic omens are good the fear of futher insolvencies is still lurking below the surface.

The Dow Jones dropped 2.4% to 9,727 by 5.30am, while the Nasdaq fell 2.3% to 2,050.

In the US the market was struggling after previously shrugging off a Commerce Department report that consumer spending dropped 0.5% in September and income was unchanged, in line with market expectations.

Analysts said the sell-off yesterday reflected unease about how firm the recovery in the US is in reality.

US shares rose on Thursday after a market rally when the government reported GDP rose at a 3.5% annual rate in the third quarter after a year of contraction.

This is the kind of news markets have been waiting for, but the concerns about the fragility of some banks was enough to hit sentiment again in early trading in the US, analysts said.