What Happened in Europe That Spooked Markets

Bleak news confidence and growth underlined the parlous state of Europe's economy on Monday, triggering a sharp fall share prices and a spike in Spanish bond yields investors fretted anew about the future of euro.

The single currency slid a two-year low against the dollar and a near 12-year trough the yen after surveys showed the troubles of the 17-nation currency bloc making consumers even more wary economists had expected.

Spain, in the of the debt and banking storm, sank deeper recession in the second quarter as gross domestic product contracted by 0.4 percent after a 0.3 percent drop the January-March period.

Adding to Madrid's woes, media reports suggested another half dozen of Spain's 17 regional authorities, facing an undeclared funding crisis, were ready follow Valencia in seeking aid the central government.

Spain has already won promise of 100 billion euros ($121 billion) from its euro zone partners to shore its banks.

But investors are increasingly concerned Europe's fourth-largest economy, like Greece, Ireland and Portugal before it, will to ask international lenders a full rescue.

"What began as a Spanish banking bailout looks to be moving rather quickly towards a possible sovereign bailout," said Jeremy Stretch, a currency strategist at CIBC.

The global economy is taking a sustained battering fears that the United States could fall a fiscal cliff, a softening growth trend in China and, all, the debilitating euro zone crisis.

"The euro zone is particularly vulnerable, it is unclear how it could put together a (Spanish) rescue package quickly," said Christian Schulz, an economist Berenberg Bank.

Investors stampeded of Spanish bonds, whose yields soared to a euro-era above 7.5 percent, while equities suffered sharp falls confidence crumbled.

European shares dropped 2.3 percent. On Wall Street the benchmark S&P 500 slid 1.4 percent.

Financial markets are braced more evidence of the damage to the euro zone economy on Tuesday. July's advance surveys of purchasing managers expected to produce readings well beneath the boom-bust mark of 50, signaling recession. At , the reports will show both manufacturing services are at least stabilising.

Two other important early glimpses of the third quarter is shaping up, Germany's IFO business climate and Belgium's leading indicator, are scheduled Wednesday and are forecast show a modest deterioration.

"Risks the economic outlook and to the euro zone sovereign situation are stacked the downside, and we see a significant probability of a rate cut by the ECB the next three months," said Riccardo Barbieri, chief European economist Mizuho in London.

Heavy Going

The drag Europe will help peg second-quarter U.S. gross domestic product growth back a ho-hum 1.4 percent from 1.9 percent in the first three months of the year, economists believe. The data be released on Friday.

Britain, has the euro zone as its main trading partner, is doing worse. Figures on Wednesday are projected show that the economy shrank by 0.2 percent in the April-June period. That would be the third straight quarter contraction.


Adapted and abridged from: CNBC, July 23, 2012.