European stocks took a beating Tuesday, a day after high-stakes
talks between Athens and eurozone finance ministers collapsed
abruptly, sparking fresh doubts over Greece's future inside the
currency bloc.
In early trade, the Stoxx Europe 600, which hit a seven-year
high last week, fell 0.6% mirroring similar losses across country
indexes in the region. German stock-exchange operator Deutsche
Börse's Eurex futures and options platform opened with a delay,
with traders citing technical issues.
In Greece, Athens main stock index, which has plummeted 22% over
the past six months, declined 4.6%, while bond yields soared anew,
signaling a fall in bond prices. The drop in Greek stocks follows a
3.9% fall on Monday.
The country's debt curve remains clearly inverted, meaning that
shorter-dated bonds yield substantially more than longer-dated
bonds. This generally indicated that investors see a heightened
risk of the country defaulting on its bonds. The spread in yields
being quoted by different brokers is also very high, indicating
uncertainty in the market.
Speaking about Monday's meeting between Greek Finance Minister
Yanis Varoufakis and his European counterparts, Barclays economists
Antonio Garcia Pascual and Thomas Harjes said discussions "ended
early and little, if any, progress was achieved."
Economists at Citigroup said that "while not entirely
surprising, the lack of any progress and the "red lines" on all
sides highlights the challenges ahead."
Lee Hardman, a currency economist at Bank of Tokyo-Mitsubishi
UFJ, noted that it is becoming more likely that Greece will exit
its current bailout program at the end of the month.
"Without financial support being in place, it is likely that
deposit and capital flight from Greek banks and Greece will
accelerate significantly, " he said.
"It will increase pressure on the [European Central Bank] to
withdraw emergency liquidity assistance for Greek banks undermining
financial stability in Greece providing a significant negative
shock for the economy."
The ministers Monday called off the negotiating session just a
few hours after it began, saying Greece left them little hope of
securing an agreement. In turn, they presented the new left-wing
government in Athens with an ultimatum: Agree to an extension of
the current EUR240 billion ($272 billion) bailout by the end of the
week or lose the lifeline of rescue loans that have sustained
Greece for nearly five years.
Greek Prime Minister Alexis Tsipras and Mr. Varoufakis, oppose
the terms of the rescue deal from the eurozone and the
International Monetary Fund, saying they are hurting its economy
and society.
Directly after talks were abandoned the euro declined to $1.1320
against the dollar, although it recovered somewhat in early
European trading Tuesday to around $1.1344. However, it remains
more than 6% lower so far this year, largely driven by diverging
monetary policy in Europe and the U.S.
Adding to the downbeat mood in European markets, was a fresh
bout of violence in eastern Ukraine. On Monday, fighting blazed
around the strategic-transport hub of Debaltseve despite a
cease-fire that went into effect at midnight Saturday and was
supposed to end months of conflict between Ukrainian forces and
Russia-backed militants in Ukraine's east.
German Chancellor Angela Merkel's spokesman said early Tuesday
that Ms. Merkel, Ukrainian President Petro Poroshenko and Russian
President Vladimir Putin had agreed "concrete steps" to allow the
Organization for Security and Cooperation in Europe to monitor the
shaky cease-fire.
Russia's Micex stock index was trading 0.7% lower early Tuesday
while its dollar-denominated RTS counterpart declined 0.3%. One
dollar now buys 63.1 ruble, 74% more than six months ago.
In commodity markets Tuesday, Brent crude was 0.2% higher at
$61.56. Gold declined 0.3% to $1,223.60 a troy ounce.
Later in the day, investors will have an eye on the German ZEW
economic sentiment release for January, which is due at 10:00
GMT.
Write to Josie Cox at josie.cox@wsj.com
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