European shares and the euro will likely face more turmoil this year, after a year in which equity markets and the single currency slumped on fears over the eurozone debt crisis and the global economy.
Europe’s main stock markets dived by between 5.5 percent and 25 percent over the course of last year, as traders set aside upbeat economic data and company results, while the euro has fallen 3 percent versus the US dollar in volatile trading.
Yields on eurozone sovereign debt meanwhile rocketed late last year as investors demanded top returns for lending money to the bloc’s most indebted countries, such as Greece and Italy.
“Many will not be sorry to see the end of 2011, a year dominated by the crisis in the eurozone and fiscal austerity and one where most equity markets lost money,” Schroders chief economist Keith Wade said. “2011 has been a disappointing year for risk assets all round. Buffeted by structural headwinds, major economies have struggled to build on the positive cyclical momentum from the end of 2010. The oil price shock, earthquake and tsunami in Japan, and more recently the eurozone debt crisis, have all played their part in interrupting the recovery that was expected for this year.”
In particular, the eurozone crisis dominated market sentiment last year and is widely expected to be the main focus this year, overshadowing geopolitical strains and the race for the White House, dealers said.
The euro ended last year by briefly diving under US$1.29 on Thursday to hit the lowest point since September 2010.
ETX Capital senior trader Manoj Ladwa predicted that this year would be broken up into a difficult first half — marred by the eurozone drama, a possible global recession and the faltering Chinese economy.
However, he also forecast that the second half would be boosted by the improving US economy and greater demand to hold equities.
Over the past week, the single currency meanwhile plunged to a series of 10-year low points against the safe-haven yen as investors reacted to mounting economic uncertainty in the eurozone.
The euro slumped on Friday to ￥99.97 — tumbling under ￥100 for the first time since June 2001 in volatile pre-holiday trade.
In recent months, the euro and European stock markets have headed south as countries struggle to get to grips with the escalating debt debacle.
“2011 will be remembered for many things, but as far as the markets are concerned, it’s the escalation of the European sovereign debt crisis that has dominated throughout,” Capital Spreads founder Simon Denham said. “From the bailout of Portugal to the sights being set on Spain and Italy, unfortunately for them, the focus will remain on these bigger European nations who have so much in the way of debt to refinance in 2012. Gains are hard to come by for the single currency as bond yields on the government debt of the peripherals remains stubbornly high.”
Among Europe’s main stock markets, Milan has been the biggest faller last year, losing almost 26 percent since the start of the year, as investors worried about a possible bailout of Italy, the eurozone’s third-biggest economy.
London’s benchmark FTSE 100 index has shed 5.5 percent to about 5,572 points, with non-euro member Britain shielded to an extent from the eurozone’s crisis, even though the bloc remains its main trading partner.